oversight

The U.S. Department of Education FY 2014 Agency Financial Report

Published by the Department of Education, Office of Inspector General on 2014-11-14.

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

U.S. Department of Education
Arne Duncan
Secretary

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



November 14, 2014
This report is in the public domain. Authorization to reproduce it in whole or in part is granted. While
permission to reprint this publication is not necessary, the citation should be: U.S. Department of
Education, Fiscal Year 2014 Agency Financial Report: Washington D.C., 2014.

This report is available on the Department’s website at:
http://www.ed.gov/about/reports/annual/index.html. On request, the report also is available in
alternative formats, such as Braille, large print, or computer diskette. For more information, please
contact our Alternate Format Center at (202) 260-0852 or by contacting the 504 coordinator via
email at om_eeos@ed.gov.

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

Notice to Limited English Proficient Persons

Notice of Language Assistance: If you have difficulty understanding English, you may request
language assistance services, free of charge, for this Department information by calling 1-800-USA-
LEARN (1-800-872-5327) (TTY: 1-800-877-8339), or email us at: Ed.Language.Assistance@ed.gov.

[SPANISH]
Aviso a personas con dominio limitado del idioma inglés: Si usted tiene alguna dificultad en entender el
idioma inglés, puede, sin costo alguno, solicitar asistencia lingüística con respecto a esta información llamando
al 1-800-USA-LEARN (1-800-872-5327) (TTY: 1-800-877-8339), o envíe un mensaje de correo electrónico a:
Ed.Language.Assistance@ed.gov.

[CHINESE]
給英語能力有限人士的通知: 如果您不懂英語, 或者使用英语有困难,您可以要求獲得向大眾提供的
語言協助服務,幫助您理解教育部資訊。這些語言協助服務均可免費提供。如果您需要有關口譯或筆
譯服務的詳細資訊,請致電 1-800-USA-LEARN (1-800-872-5327) (聽語障人士專線:1-800-877-8339),
或電郵: Ed.Language.Assistance@ed.gov.

[VIETNAMESE]
Thông báo dành cho những người có khả năng Anh ngữ hạn chế: Nếu quý vị gặp khó khăn trong việc hiểu
Anh ngữ thì quý vị có thể yêu cầu các dịch vụ hỗ trợ ngôn ngữ cho các tin tức của Bộ dành cho công chúng.
Các dịch vụ hỗ trợ ngôn ngữ này đều miễn phí. Nếu quý vị muốn biết thêm chi tiết về các dịch vụ phiên dịch
hay thông dịch, xin vui lòng gọi số 1-800-USA-LEARN (1-800-872-5327) (TTY: 1-800-877-8339), hoặc
email: Ed.Language.Assistance@ed.gov.




                                                                  FY 2014 Agency Financial Report—U.S. Department of Education
[KOREAN]
영어 미숙자를 위한 공고: 영어를 이해하는 데 어려움이 있으신 경우, 교육부 정보 센터에 일반인 대상
언어 지원 서비스를 요청하실 수 있습니다. 이러한 언어 지원 서비스는 무료로 제공됩니다. 통역이나
번역 서비스에 대해 자세한 정보가 필요하신 경우, 전화번호 1-800-USA-LEARN (1-800-872-5327) 또는
청각 장애인용 전화번호 1-800-877-8339 또는 이메일주소 Ed.Language.Assistance@ed.gov 으로
연락하시기 바랍니다.

[TAGALOG]
Paunawa sa mga Taong Limitado ang Kaalaman sa English: Kung nahihirapan kayong makaintindi ng
English, maaari kayong humingi ng tulong ukol dito sa inpormasyon ng Kagawaran mula sa nagbibigay ng
serbisyo na pagtulong kaugnay ng wika. Ang serbisyo na pagtulong kaugnay ng wika ay libre. Kung kailangan
ninyo ng dagdag na impormasyon tungkol sa mga serbisyo kaugnay ng pagpapaliwanag o pagsasalin,
mangyari lamang tumawag sa 1-800-USA-LEARN (1-800-872-5327) (TTY: 1-800-877-8339), o mag-email
sa: Ed.Language.Assistance@ed.gov.

[RUSSIAN]
Уведомление для лиц с ограниченным знанием английского языка: Если вы
испытываете трудности в понимании английского языка, вы можете попросить, чтобы вам
предоставили перевод информации, которую Министерство Образования доводит до
всеобщего сведения. Этот перевод предоставляется бесплатно. Если вы хотите получить
более подробную информацию об услугах устного и письменного перевода, звоните по
телефону 1-800-USA-LEARN (1-800-872-5327) (служба для слабослышащих: 1-800-877-8339),
или отправьте сообщение по адресу: Ed.Language.Assistance@ed.gov.

For Fiscal Year 2014, in addition to the Agency Financial Report (AFR), the Department will post to
its website an Annual Performance Report (APR), and a Summary of Performance and Financial
Information (SPFI). The APR and the Congressional Budget Justification will be posted on the
Department’s website at http://www.ed.gov/about/reports/annual/index.html with the FY 2016
budget.

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

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




FY 2014 Agency Financial Report—U.S. Department of Education
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                          FY 2014 Agency Financial Report—U.S. Department of Education
                                                    About This Report
The purpose of the United States Department of Education’s (the Department) Fiscal Year (FY)
2014 Agency Financial Report (AFR) is to inform Congress, the President, and the American
people on how the Department has used federal resources entrusted to it to promote
achievement and preparedness of youth entering a global environment by fostering excellence
and ensuring equal access. We demonstrated our commitment to education by, among other
things: improving access to early learning programs, reforming elementary and secondary
education, making higher education more accessible and affordable, and working to attract
talented people to the teaching profession. We also demonstrated that we are good stewards of
financial resources by putting in place well-controlled and well-managed business and financial
management systems and processes.
The AFR also provides high-level financial and performance highlights, assessments of
controls, a summary of challenges, and a demonstration of our stewardship. This report is
required by legislation and complies with the requirements of the Office of Management and
Budget’s Circulars A-11, Preparation, Submission, and Execution of the Budget, and A-136,
Financial Reporting Requirements. The report satisfies the reporting requirements contained in
the following legislation:
    Improper Payments Elimination and Recovery Act of 2010
    Government Performance and Results Act (GPRA) Modernization Act of 2010
    Federal Information Security Management Act of 2002
    Reports Consolidation Act of 2000
    Federal Financial Management Improvement Act of 1996
    Government Management Reform Act of 1994
    Chief Financial Officers Act of 1990
    Federal Managers’ Financial Integrity Act of 1982
Federal Student Aid (FSA), a principal office of the Department and a designated Performance-
Based Organization, also produces a separate Annual Report that details their financial and
program performance. Summary level information about FSA activities can be found in the
applicable sections of this report. For more detail on FSA’s performance and financial
information, refer to StudentAid.gov.

                                                   Certificates of Excellence




        The Department of Education received the Association of Government Accountants’
       Certificate of Excellence in Accountability Reporting and a Best-in-Class Award for Best
                              Report That Tells a Story for its FY 2013 AFR.

FY 2014 Agency Financial Report—U.S. Department of Education                                      i
                        How This Report Is Organized
The AFR is designed to focus on use of federal resources assigned to the Department to
support its mission of promoting equal access and improvement nationwide for youths in
education, with a particular emphasis on the challenges ahead.


                                1. Management’s Discussion and Analysis
                                This section provides information about the Department’s
                                mission and organizational structure as well as its high-level
                                performance results, financial highlights, and management
                                assurances regarding internal controls.




                                2. Financial Section
                                This section provides a message from the Chief Financial
                                Officer, the financial statements and notes, required
                                supplementary information and supplementary stewardship
                                information, and the report from our independent auditors.




                                3. Other Information
                                This section provides improper payments reporting details, the
                                schedule of spending, a summary of financial statement audit
                                and management assurances, and the Office of Inspector
                                General’s Management and Performance Challenges for
                                FY 2015 Executive Summary.




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




ii                                                      FY 2014 Agency Financial Report—U.S. Department of Education
DISCUSSION AND ANALYSIS
                                                             Message From the Secretary
                                                                      November 14, 2014

                                                                      I am pleased to present the Department of Education’s
                                                                      FY 2014 Agency Financial Report (AFR). In this report, we
                                                                      share the Department’s financial and performance highlights
                                                                      over the fiscal year ending September 30, 2014.

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

                                                                      From improving access to early learning programs, to reforming
                                                                      elementary and secondary education, to making higher
                                                                      education more accessible and affordable, to working to attract
                                                                      talented people to the teaching profession, we have made an
                                                                      unprecedented commitment to education.

                     Performance Highlights

                     In the Department’s Strategic Plan for FY 2014–2018, our mission is reflected in six strategic
                     goals and 22 supporting strategic objectives, as well as six programmatic two-year Agency
                     Priority Goals, which are posted on performance.gov. The Management’s Discussion and
                     Analysis section of this AFR contains a high-level discussion about our approach to
                     performance management. To the best of my knowledge, the summary performance data
                     included in this AFR are complete and reliable in accordance with federal requirements.

                     For those seeking additional details regarding our performance and progress toward achieving
                     our strategic goals, I invite you to read our Annual Performance Report, which will be released
                     at the same time as the President’s FY 2016 budget and Congressional Budget Justifications.

                     Financial Management

                     The balance sheet of the Department now exceeds $1.0 trillion in assets. These are primarily
                     from Credit Program Receivables (loans) and the Fund Balance with Treasury. We had
                     $924 billion in loans outstanding at the end of the year. This included new loans made in 2014
                     and the balances of old loans less collections of interest and principal. The Department is the
                     smallest of 15 cabinet-level agencies in terms of government staff, with approximately
                     4,100 employees, yet it has the third largest grant portfolio among the 26 federal grant-making
                     organizations.

                     Good stewardship is a management imperative and priority for our Department, and I am
                     assured that the financial data included in this AFR are complete and reliable in accordance
                     with federal requirements. I am proud to report that we have received our 13th consecutive
                     unmodified or “clean” audit opinion with no material internal control weaknesses and with no
                     material instances of noncompliance with applicable laws and regulations. Last year, the
                     Department was honored for the 10th time with a Certificate of Excellence in Accountability
                     Reporting Award from the Association of Government Accountants, as well as a special award
                     for producing a report that tells a compelling story about Departmental activities. The financial
                     report includes information and assurances about the Department’s financial management
                     systems and controls as required by the Federal Managers’ Financial Integrity Act.



                     FY 2014 Agency Financial Report—U.S. Department of Education                                                       iii
MESSAGE FROM THE SECRETARY



Management Challenges

We remain committed to improved governance and better business processes. Management
has worked closely with the Office of Inspector General (OIG) to gain its perspective about our
most significant management and performance challenges, which are presented in the Other
Information section of this report. The OIG's review addresses five FY 2015 management
challenges: improper payments, information technology security, oversight and monitoring, data
quality and reporting, and information technology system development and implementation.

The Department takes these challenges, as well as other issues identified through our own self­
assessments of operations and external audits, seriously. The Department implemented
initiatives to respond to the identified challenges and improve its systems and processes,
including issues of grants monitoring, IT systems, and management of student loan repayments.

Outreach and Partnerships

Funding education is primarily a state and local function in the United States. Consequently,
sharing information with others is an important function of the Department. On our YouTube
channel , the Department shares stories about schools where reform efforts and innovations are
making a difference for students. Our website, ed.gov, highlights Departmental initiatives, as
well as focusing on a diversity of outside partnerships that support our mission.

Our Twitter page, @used.gov, has grown to reach more than 250,000 followers who have joined
us in conversations about challenges facing their schools and communities. Twitter town halls
and impromptu exchanges help to answer questions and gain feedback that help shape our
outreach activities and discussions about education policy. The Department's official Facebook
page shares photos, videos, and information with its active members.

Our blog, Homeroom, provides stakeholders with opportunity to learn about financing college,
combating bullying, supporting teachers, and other important topics. The Department interacts
with hundreds of national associations and organizations that represent the interests of
prekindergarten-12 education, civil rights and advocacy, and higher education communities by
keeping them apprised of program progress, policy decisions, and funding opportunities.
Through e-mail and stakeholder forums, we and our national partners share updates with state
and local affiliates.

Looking Ahead

Guided by our new strategic plan for FY 2014-2018, available on ed .gov and performance.gov,
we have charted a road map for future success, and we will continue to evaluate our progress
toward those goals and objectives. We look forward to working with our partners and
colleagues in Congress, the states, and across the education community by keeping foremost in
our minds why we care about education.

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



([QI~ 

Arne Duncan


iv                                                      FY 2014 Agency Financial Reporl-U.S. Department of EducaUon
                                                                    Contents
About This Report .......................................................................................................................................... i
How This Report Is Organized .......................................................................................................................ii
Message From the Secretary ........................................................................................................................ iii

Management’s Discussion and Analysis
About the Management’s Discussion and Analysis ...................................................................................... 2
About the Department ................................................................................................................................... 4
The Department’s Approach to Performance Management ......................................................................... 7
The Department’s Agency Priority Goals .................................................................................................... 10
Looking Ahead and Addressing Challenges ............................................................................................... 18
Financial Highlights ..................................................................................................................................... 23
Limitations of the Financial Statements ...................................................................................................... 36
Analysis of Controls, Systems, and Legal Compliance .............................................................................. 37

Financial Section
Message From the Chief Financial Officer .................................................................................................. 50
About the Financial Section ........................................................................................................................ 52
Financial Statements ................................................................................................................................... 54
Notes to the Financial Statements .............................................................................................................. 58
Required Supplementary Information ......................................................................................................... 95
Required Supplementary Stewardship Information .................................................................................... 97
Report of the Independent Auditors .......................................................................................................... 102

Other Information
About the Other Information Section ......................................................................................................... 120
Improper Payments Reporting Details ...................................................................................................... 121
Schedule of Spending ............................................................................................................................... 137
Summary of Financial Statement Audit and Management Assurances ................................................... 138
Memorandum From the Office of Inspector General ................................................................................ 139
Office of Inspector General’s (OIG) Management and Performance Challenges
    for Fiscal Year 2015 Executive Summary .......................................................................................... 140
Freeze the Footprint .................................................................................................................................. 149

Appendices
Appendix A: Selected Department Web Links and Education Resources ............................................... 152
Appendix B: Glossary of Acronyms and Abbreviations ............................................................................ 156




FY 2014 Agency Financial Report—U.S. Department of Education                                                                                                v
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vi                             FY 2014 Agency Financial Report—U.S. Department of Education
Management’s Discussion and Analysis
MANAGEMENT’S DISCUSSION AND ANALYSIS


           About the Management’s Discussion and Analysis
This section provides information on performance results, financial statements, systems and
controls, compliance with laws and regulations, and actions taken or planned to address
problems. The Department is committed to making each year’s report more useful to all readers
and to meet increasingly high standards for internal controls and good stewardship of federal
investments. To help continue to improve the content of the Agency Financial Report (AFR),
readers are encouraged to provide their feedback at: AFRComments@ed.gov.

The Department continues to enhance the usefulness of the AFR as a summary of the
Department’s activities in FY 2014 by using the report and relevant web content. Our intent is to
provide users with access to useful information about the Department and its financial activities.
This year, the Department concentrated on improving disclosures and continuing its
commitment to reader-friendly reporting, with a particular emphasis on making the Notes to the
Financial Statements more reader-friendly.

Through its performance, the Department has demonstrated its commitment to education by,
among other things: improving access to early learning programs, reforming elementary and
secondary education, making higher education more accessible and affordable, and working to
attract talented people to the teaching profession. Through its ongoing commitment to being
good stewards of its resources, the Department seeks to demonstrate that we have in place
well-controlled and managed business and financial management systems and processes. In
addition, we continually strive to improve our enterprise risk management methods and the
means to assess and test our assumptions about risk.

Mission and Organizational Structure

This section provides information about the Department’s mission, an overview of its history,
and its structure. The active links include: the organization chart and principal offices, a map of
its regional offices, and a description of selected offices by function, as well as a link to the full
list of Department offices.

Discussion of Performance

The Department has elected to produce separate financial and performance reports for the last
six years. The Agency Financial Report for FY 2014 provides a high-level description of
performance measures and goals based on the FY 2014–2018 Strategic Plan, with a focus on
the Agency Priority Goals (APGs) for 2014–15. A detailed discussion of performance
information for FY 2014 will be provided in the Department’s Annual Performance Report to be
released at the same time as the President’s FY 2016 Budget.

The section includes an overview of performance reporting, a report on the APGs for 2014–15,
and high-level discussion of performance information. The Looking Ahead and Addressing
Challenges section describes the challenges that the Department aims to address in order to
achieve progress against the FY 2014–2018 Strategic Plan. The results achieved from
Department expenditures are discussed at a high level in the AFR. For more details about
performance, the reader should refer to the Department’s budget and performance web page
and performance.gov.

To view information on all Department programs, visit the Department’s website.




2                                                            FY 2014 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


Financial Highlights

The Department has added information in the Financial Highlights section of the report and
focused on enhancing the clarity of the Notes to the Financial Statements to provide a more
understandable depiction of its key financial balances and activities for FY 2014 and to identify
and explain significant trends.

The Department expends a substantial amount of its budgetary resources and disburses large
cash amounts on grant and loan programs intended to increase college access, quality, and
completion; improve preparation for college and career from birth through 12th grade, especially
for children with high needs; and ensure effective educational opportunities for all students.
Therefore, the Department has included more high-level details about the sources and uses of
the allotted funds and a composition of and summary of net costs by program.

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

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

Analysis of Controls, Systems, and Legal Compliance

To demonstrate effective stewardship of these resources, the Department has implemented
effective controls over operations, systems, and financial reporting as described in the Analysis
of Controls, Systems, and Legal Compliance section of the report.

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

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




FY 2014 Agency Financial Report—U.S. Department of Education                                        3
MANAGEMENT’S DISCUSSION AND ANALYSIS


                                About the Department

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

Who We Are. In 1867, the federal government recognized that furthering education was a
national priority and created a federal education agency to collect and report statistical data.
The Department was established as a cabinet-level agency in 1979. Today, the Department
supports programs that positively impact every area and level of education.

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

Our Public Benefit. The Department is committed to helping to ensure that students throughout
the nation develop skills to succeed in school, college, and the workforce. While recognizing the
primary role of states and school districts in providing a high-quality education, the Department
supports efforts to employ highly qualified teachers and administrators, establish challenging
content and achievement standards, and monitor students’ progress against those standards.

The Department’s largest asset is the portfolio of student loans. Grants to states are the second
largest item on the balance sheet, mostly for elementary and secondary education, awarded
based on legislated formulas. The third biggest item is student aid to help pay for college
through Pell Grants, Work Study, and other campus-based programs. The Department also
carries out competitive grant programs to promote innovation, performs research, collects
education statistics, and enforces civil rights statutes.

Offices by Function. Federal Student Aid (FSA) administers need-based financial assistance
programs for students pursuing postsecondary education and makes available federal grants,
direct loans, and work-study funding to eligible undergraduate and graduate students.

The offices of Elementary and Secondary Education (OESE), Special Education and
Rehabilitative Services (OSERS), Innovation and Improvement (OII), English Language
Acquisition (OELA), Postsecondary Education (OPE), and Career, Technical, and Adult
Education (OCTAE) provide leadership, technical assistance, and financial support to state and
local educational agencies and institutions of higher education for reform, strategic investment,
and innovation in education.

Institute of Education Sciences (IES) is the research arm of the Department. The Department’s
goal is to provide rigorous and relevant evidence on which to ground education practice and
policy and share this information broadly. By identifying what works, what doesn’t, and why, IES
aims to improve educational outcomes for all students, particularly those at risk of failure. Its
goal is to transform education into an evidence-based field in which decision makers routinely




4                                                          FY 2014 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


seek out the best available research and data before adopting programs or practices that will
affect significant numbers of students.

The Office for Civil Rights (OCR) works to ensure equal access to education and to promote
educational excellence throughout the nation through vigorous enforcement of civil rights. OCR
serves student populations facing discrimination and the advocates and institutions promoting
systemic solutions to civil rights issues.

The Office of Planning, Evaluation and Policy Development (OPEPD) serves as the principal
adviser to the Secretary on all matters relating to policy development and review, performance
measurement and evaluation, budget processes and proposals, overseeing policy development,
and reviewing policy recommendations. Two major components, the Budget Service and the
Policy and Program Studies Service, are housed within OPEPD.

Regional Offices. The Department has 10 regional offices that provide points of contact and
assistance for schools, parents, and citizens. Regional offices offer support through
communications, civil rights enforcement, and federal student aid services to promote efficiency,
effectiveness, and integrity in the programs and operations of the Department. In addition to
enforcement offices in federal regions, enforcement offices are located in Washington, D.C.,
and Cleveland, Ohio.

Descriptions of the principal offices and overviews of the activities of the Department and its
programs can be found on the Department’s website.




FY 2014 Agency Financial Report—U.S. Department of Education                                      5
MANAGEMENT’S DISCUSSION AND ANALYSIS




                        Our Organization in Fiscal Year 2014
    This chart reflects the statutory organizational structure of the U.S. Department of
    Education. Interactive and text versions of the coordinating structure of the Department
    are available.




6                                                          FY 2014 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


       The Department’s Approach to Performance Management

Performance Management Framework

In accordance with the GPRA Modernization Act of 2010, the Department’s framework for
performance management starts with the Strategic Plan, including its Agency Priority Goals,
which serve as the foundation for establishing long-term priorities and developing performance
goals, objectives, and measures by which the Department can gauge achievement of its stated
outcomes. Progress towards the Department’s strategic and Agency Priority Goals is measured
using data-driven review and analysis. This focus promotes active management engagement
across the Department. Additional information is available in the Department’s Annual
Performance Plans and Annual Performance Reports.

Based on data available as of June 30, 2014, 18 metrics in the FY 2014–18 Strategic Plan
showed significant progress toward the established goals, including important areas such as
postsecondary degree attainment, the resolution of civil rights investigations, increased access
to data, and research studies related to education.

The FY 2014–18 Strategic Plan is comprised of six strategic goals and six Agency Priority Goals
and aims to align the Administration’s yearly budget requests and the Department’s legislative
agenda. The Department continues to welcome input from Congress, state and local partners,
and other education stakeholders about the Strategic Plan. Questions or comments about the
Strategic Plan should be e-mailed to APP_APRComments@ed.gov.




FY 2014 Agency Financial Report—U.S. Department of Education                                       7
MANAGEMENT’S DISCUSSION AND ANALYSIS


FY 2014–18 Strategic Plan




8                                      FY 2014 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS




FY 2014 Agency Financial Report—U.S. Department of Education                                      9
MANAGEMENT’S DISCUSSION AND ANALYSIS


                    The Department’s Agency Priority Goals
The Department identified six Agency Priority Goals (APGs) for FY 2014–15 that serve to focus
its activities, with a particular emphasis over the next two years. These goals are consistent with
the Department’s five-year strategic plan, which will be used to monitor and report regularly on
progress, reflect the Department’s cradle-to-career education strategy, and help concentrate
efforts on the importance of teaching and learning at all levels of the education system.
Quarterly updates for the APGs are available on performance.gov.

Progress on the Department’s FY 2014–15 Agency Priority Goals1

         Agency Priority Goal: Increase college degree attainment in America

     Goal for FY 2014–2015: By September 30, 2015, 45.6 percent of adults ages 25–34 will
     have an associate degree or higher, which will place the nation on track to reach the
     President’s goal of 60 percent degree attainment by 2020.

                                     Supports Strategic Goal 1.

Overview: In 2009, the President set a goal that, by 2020, the United States will have the
highest proportion of college graduates in the world. Meeting this goal will require millions of
additional Americans to earn a postsecondary degree by the end of this decade. The
President’s focus on the educational attainment among adults ages 25–34 allows the
Department to assess progress in preparing the next generation of workers and to benchmark
for international comparisons.

The Department’s strategy to implement the President’s College Value and Affordability Agenda
comprises three areas of focus: (1) promoting evidence-based innovation and competition so
that colleges offer students a greater range of affordable, high-quality options than they do
today, (2) fostering institutional and student accountability in tandem with better consumer
awareness, and (3) ensuring that student debt remains affordable. These strategies aim to
support college attainment by reducing the cost and amount of time necessary to attain a
degree, by measuring college performance and providing consumer information about cost and
outcomes, by supporting the use of open educational low-cost textbooks, and by incentivizing
state, institutional, and student behavior.

Progress: Starting from a baseline of 44.0 percent in 2012, the Department projected that the
annual increase of educational attainment among adults ages 25–34 would grow progressively
each year above the four-year historical average of 0.7 percentage points and established
performance targets of 44.7 percent for 2014 and 45.6 percent for 2015. The Department is on
pace to achieve this APG as 44.8 percent of adults ages 25–34 have an associate’s degree or
higher, exceeding the 2014 performance target (note that the rate reflects prior year data, in this
case from 2013, but is reported in 2014 when data are available). Examples of the Department’s
activities that support this goal include collaborating with the White House to host College
Opportunity Summits that bring together superintendents and college presidents; developing
and refining the College Scorecard; and redesigning existing programs to encourage efforts to
improve college fit, reduce the need for remediation, increase the availability of open
educational resources, and implement evidence-based practices. These activities promote

1The performance information reported in this section is current as of Quarter 3 of FY 2014 (April 1–
June 30, 2014).


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innovation, competition, and accountability in the postsecondary sector, which will boost
completion rates and educational attainment.

Opportunities and Challenges: One challenge toward achieving this goal is that the
Department’s budgetary proposals have not received traction in Congress, and it remains
unclear whether recent proposals that reflect the President’s agenda will gain support. As such,
success will also depend largely on the extent to which states invest in higher education.
Specifically, whether and to what extent states and institutions (a) implement policies and
programs to increase college access and success, (b) reduce costs and time to completion,
(c) support accelerated learning opportunities, including dual enrollment, (d) develop and adopt
effective and innovative practices that improve student outcomes, and (e) promote seamless
transitions from secondary to postsecondary education and among higher education institutions
will influence the Department’s success in achieving this APG. Although the Department has
some limited leverage to influence states’ policies and the practices of postsecondary
institutions, the Department will use its available resources, including implementation and
impact of programs and technical assistance, and the ability to convene stakeholders to
encourage collaboration and best practices.

      Agency Priority Goal: Support implementation of college- and career-ready
                             standards and assessments

     Goal for FY 2014–2015: By September 30, 2015, at least 50 states/territories will be
     implementing next-generation assessments, aligned with college- and career-ready
     standards.

                                                   Supports Strategic Goal 2.

Overview: The adoption of internationally benchmarked college- and career-ready standards is
the foundation to improving educational outcomes for all students and a fundamental step
toward increasing the number of college graduates in the United States. Moreover, these
standards must be coupled with high-quality formative and summative assessments that will
measure the extent to which students are mastering them.

Progress: Most states have adopted college- and career-ready standards and are in the
process of developing and testing the assessments aligned with those standards. The Race to
the Top - Assessment (RTTA) consortia and the consortia developing alternate assessments
based on alternate achievement standards completed the field testing of their assessments in
preparation for operational administration in spring 2015.

Opportunities and Challenges: State capacity to implement college- and career-ready
standards and assessments aligned with those standards varies. To address this challenge, the
Department is developing and targeting technical assistance activities that will, in part, increase
state capacity to leverage limited resources and continue to identify promising practices across
multiple states. For example, the Department will build a “bank” of resources that support the
implementation of college- and career-ready standards. Included in such a bank will be
materials to assist in full and effective implementation of college- and career-ready standards
developed or identified by offices across the Department.

The Department will continue to leverage the ESEA flexibility monitoring and renewal process to
support full implementation of college- and career-ready standards and aligned, valid, and
reliable assessments in states that have received ESEA flexibility. By using the ESEA flexibility



FY 2014 Agency Financial Report—U.S. Department of Education                                               11
MANAGEMENT’S DISCUSSION AND ANALYSIS


monitoring process, the Department can track state implementation and identify areas where
technical assistance is needed. This monitoring approach follows the different kind of
relationship the Department has built internally across its offices and externally with states
during the ESEA flexibility approval process, including the use of cross-Departmental teams
(including staff from the Implementation and Support Unit (ISU), Office of Special Education
Programs (OSEP), and the Office of School Turnaround), reducing burden and duplication, and
reducing overlap between other Department programs and ESEA flexibility.

       Agency Priority Goal: Improve learning by ensuring that more students
                        have effective teachers and leaders

     Goal for FY 2014–2015: By September 30, 2015, at least 37 states will have fully
     implemented teacher and principal evaluation and support systems that consider multiple
     measures of effectiveness, with student growth as a significant factor.

                                     Supports Strategic Goal 2.

Overview: Teacher and principal evaluation and support systems enable the development and
identification of effective educators and provide information to improve the educator workforce.
The nation needs to do more to ensure that every student has an effective teacher, every school
has an effective leader, and every teacher and leader has access to the preparation, ongoing
support, recognition, and collaboration opportunities he or she needs to succeed. The
Department will help strengthen the profession by focusing on meaningful feedback, support,
and incentives at every stage of a career, based on fair evaluation and support systems that
look at multiple measures, including, in significant part, student growth.

The Department will support states in the development and adoption of state requirements for
comprehensive teacher and principal evaluations and support systems as well as in district
development and implementation of comprehensive educator evaluation systems. This
additional support is necessary so that teachers and educator evaluators are able, for example,
to use and develop learning objectives to measure student growth and to implement new
classroom observation tools.

Progress: The performance targets for this APG are based on state implementation timelines
provided through original ESEA flexibility requests. These timelines indicated that 37 states
expected to implement the systems by September 30, 2015. As of June 30, 2014, 10 states
have fully implemented teacher and principal evaluation and support systems.2

Opportunities and Challenges: Providing support to states to do this work well is resource-
intense. Additionally, it is difficult for the Department to maintain the momentum for reform,
given districts’ and states’ current political situations and potential changes in leadership.
However, as states continue work to implement teacher and leader evaluation systems, the
Department will continue to provide robust technical assistance. In addition to monitoring, the
Department has designed a one-year ESEA flexibility extension process for Window 1 and 2
states. States that are on track to meet their original ESEA flexibility commitments relating to
evaluation and support systems will be able to use this process to continue their work in
2014–15. The Department will work with states that have requested changes to their timelines


2 “Fully implemented” is defined as the school year in which teachers and principals receive effectiveness
ratings.


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or sequencing of events outside of the extension process to ensure that they, too, can continue
their work in the 2014–15 school year and are making continuous improvement in their systems.

                   Agency Priority Goal: Support comprehensive early learning
                                      assessment systems

     Goal for FY 2014–2015: By September 30, 2015, at least nine states will be collecting
     and reporting disaggregated data on the status of children at kindergarten entry using a
     common measure.

                                                   Supports Strategic Goal 3.

Overview: Kindergarten entry assessments (KEAs), when properly designed, are included in a
state’s comprehensive early learning assessment system, improve student achievement and
early learning programs’ effectiveness, and inform professional development to improve the
early learning workforce. KEAs also can inform instruction and support students’ educational
success by identifying the early learning needs of each child. As such, KEAs provide an
opportunity for teachers and families to understand the status of children as they are entering
kindergarten and an opportunity to provide policy makers with information needed to support
high-quality early learning programs that ensure children enter school prepared for success.

Progress: The Department is on track to achieve this APG. As of June 30, 2014, the Early
Learning Challenge Technical Assistance Center (ELC TAC) reported that six states are
collecting and reporting disaggregated data on the status of children at kindergarten entry using
a common measure. Additionally, the Department’s Office of Early Learning conducted an
analysis of the Race to the Top - Early Learning Challenge (RTT-ELC) grantees’ annual
performance reports and found that four states are in the process of revising their current
statewide KEAs, five other states are beginning a phased-in implementation of KEAs, and six
others are pilot testing their KEAs. Although there are challenges with the implementation of
KEAs, the Department is optimistic about achieving the APG.

Opportunities and Challenges: The Department plans on releasing an annual report about
RTT-ELC grantees that includes information on how states are engaging stakeholders in KEA
development, providing more professional development to teachers, and evaluating what is and
is not working in order to improve the KEA process. The sharing of these lessons learned will
advance progress toward this goal. Additionally, the Department will reach out to external
organizations that share our interest in advancing quality KEAs to develop strategies that may
increase our collective impact.

Because assessment in early learning is new, many states are in the early stages of developing
valid and reliable measures for KEAs. Constructing and testing these instruments and
implementing them across every school in the state will be challenging and will take time. In
addition, new measures and systems require significant investment and state budget cuts could
impact deployment. The Department will continue to convene states and share resources that
support states in their collecting and reporting of disaggregated data on the status of children at
kindergarten entry using a common measure.




FY 2014 Agency Financial Report—U.S. Department of Education                                               13
MANAGEMENT’S DISCUSSION AND ANALYSIS



           Agency Priority Goal: Ensure equitable educational opportunities

     Goal for FY 2014–2015: By September 30, 2015, the number of high schools with
     persistently low graduation rates will decrease by 5 percent annually. The national high
     school graduation rate will increase to 83 percent, as measured by the Adjusted Cohort
     Graduation Rate, and disparities in the national high school graduation rate among
     minority students, students with disabilities, English learners, and students in poverty will
     decrease.

                                    Supports Strategic Goal 4.

Overview: Equality of opportunity is a core American value. Young people in this country—
regardless of wealth, home language, zip code, gender, sexual preference, race or disability—
must have the chance to learn and achieve. Through Race to the Top (RTT), the School
Improvement Grant (SIG) program, ESEA flexibility, and other federal programs, the
Department is providing significant resources to improve the nation’s lowest-achieving schools
dramatically by using intensive turnaround models and identifying the low-achieving schools that
are showing strong evidence of successfully turning around. The Department continues to focus
on supporting innovation, not just compliance monitoring, and on spurring growth in
achievement, not just absolute achievement measures as done in the past.

Increasing the national high school graduation rate and decreasing disparities in the graduation
rate is critical to achieving the President’s college graduation goal. The nation has made
significant progress in increasing graduation rates, but gaps between rates for different student
groups continue to persist. This APG aims to reduce that gap.

Progress: The Department announced the Excellent Educators for All initiative, a 50-state
strategy to support state efforts to ensure that low income students and students of color have
equal access to qualified and effective teachers and leaders. This initiative will include a new
technical assistance network, educator equity data profiles, guidance for states on developing
educator equity plans, and state submission of new educator equity plans. The Department
expects this initiative, as well as the support provided through the programs that contribute to
this APG, will result in continued improvement to the high school graduation rate and a
reduction in the number of high schools with persistently low graduation rates.

Opportunities and Challenges: One key challenge in achieving this APG is providing
differentiated support to states based on their current status and progress in increasing
graduation rates. While all states have room for improvement, some states are farther behind
than others, particularly for different subgroups of students. Recently, the Department
addressed one major barrier, which was the incomparability of graduation rate data across
states. All states are now required to use an adjusted cohort graduation rate, and the
Department is reporting these data at the state, district, and school levels. However, differences
in how states define a regular high school diploma, and other technical features of their
calculations, continue to make comparisons challenging. The Department will continue to
improve its data release processes to ensure that data on graduation rates are released to the
public on a regular schedule and on a timely basis to help states and districts better use data to
drive improvement. The Department will also use the upcoming ESEA flexibility renewal process
as an opportunity to support states in continuously improving their systems of differentiated
recognition, accountability, and support to ensure that they are effectively identifying and
supporting schools with low graduation rates for all students and for particular subgroups of
students.


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Another challenge for this APG is sustaining the reforms in schools after SIG funding ends.
Insufficient focus or funding for comprehensive turnaround efforts at the state and local levels
compounds this challenge. As such, the Department will develop and disseminate guidance and
technical assistance on sustainability strategies to help states and districts continue reforms
after federal funding ends. Additionally, the Department will provide states with guidance on how
to implement recent legislative changes to the SIG program that extended the length of the
grants that the Department can award. The guidance will encourage states to use the additional
time for both planning and sustainability activities during the grant period.

                 Agency Priority Goal: Enable evidence-based decision making

     Goal for FY 2014–2015: By September 30, 2015, the percentage of select new (non-
     continuation) competitive grant dollars that reward evidence will increase by 70 percent.

                                                   Supports Strategic Goal 5.

Overview: There is an increasing emphasis from the Department and among stakeholders on
the importance of using evidence to support government program funding decisions. In support
of this APG, the Department is increasing its internal capacity to make competitive grant awards
based on the existing strength of evidence. For example, with the inclusion of a common
evidence framework in the Education Department General Administrative Regulations
(EDGAR), competitive grant programs may select from four tiers of evidence to use as priorities3
or selection criteria, as appropriate. Additionally, through its mix of grants, contracts, and
internal analytic work, the Department aims to support the use of research methods and
rigorous study designs that provide evidence that is as robust as possible.

Progress: In FY 2014, five competitions in the Office of Innovation and Improvement (OII), the
Office of Elementary and Secondary Education (OESE), and the Office of Postsecondary
Education (OPE) are using evidence through eligibility requirements, competitive preference
priorities, and selection criteria. As such, the Department anticipates meeting its performance
target for this APG.

Opportunities and Challenges: The Department is exploring ways to support and build the
capacity of program offices as they shift to evidence-based funding models. For example, the
Department leverages the Regional Educational Laboratories’ (RELs) resources about logic
models and evaluation design by sharing them with applicants, grantees, and program offices.
Although these resources support both internal and external stakeholders, the Department has
limited resources to provide direct and targeted technical assistance to applicants and grantees,
which vary in their comfort with and understanding of evaluation and use of evidence. To
continue building the capacity of the education field to use and generate evidence, it is
important that the Department is able to provide appropriate technical assistance to its grantees
and applicants. The Department anticipates achieving this year’s performance target for this
APG based on projections about which competitive grant programs may make new awards
during FY 2014.




3 The Department may use a priority as an absolute priority, meaning applicants must propose projects
that meet it to be eligible to receive funds, or as a competitive preference priority, meaning applicants
may choose to address it and could receive additional points depending on how well the priority is
addressed.


FY 2014 Agency Financial Report—U.S. Department of Education                                                15
MANAGEMENT’S DISCUSSION AND ANALYSIS


Cross-Agency Priority Goals

In accordance with the GPRA Modernization Act of 2010, interim Cross-Agency Priority Goals
(CAP Goals) were published on performance.gov in March 2014. The CAP Goals are divided
into two categories:

               Mission CAP Goals                            Management CAP Goals
    Cybersecurity                                  Customer Service
    Climate Change (federal actions)               IT Delivery
    Insider Threat and Security Clearance          Strategic Sourcing
    Job-creating Investment                        Shared Services
    Infrastructure Permitting Modernization        Benchmarking and Mission-support
    STEM Education                                  Operations
    Service Member and Veterans Mental             Open Data
     Health                                         Lab to Market
                                                    People and Culture

Performance.gov is updated on a quarterly basis for each CAP Goal. The website will include
information required by law, such as goal leader(s), contributing agencies, organizations,
programs, targets, key milestones, and major management challenges, as well as plans to
address these challenges. Quarterly Performance Updates for the website on progress will be
provided by the goal leader in coordination with the Performance Improvement Council, the
Office of Management and Budget (OMB), corresponding government-wide management
council, and contributing agencies. (A-11, Part 6, 220.5)

Each CAP Goal has a goal leader(s) and deputy goal leader(s) who will manage the processes
by which goals are executed. Goal leaders are given flexibility when managing CAP Goals and
are encouraged to leverage existing structures as much as practicable (e.g., existing working
groups, interagency policy committees, councils). Every CAP Goal will have a governance team
chaired by the goal leader, a deputy goal leader, and representatives from agencies contributing
to the goal, OMB, and others as determined by the goal leader. Each governance team will
develop an action plan explaining how the Federal Government will execute on the goal,
including agencies’ contributions, areas where cross-agency coordination is needed, and
anticipated risks or obstacles. The action plan will be updated as experience is gained and new
information is learned. (A-11, Part 6, 220.9)

In addition to the Agency Priority Goals, the Department contributes to CAP Goals as required
by the GPRA Modernization Act of 2010, including:

Customer Service: Deliver world-class customer services to citizens by making it faster and
easier for individuals and businesses to complete transactions and have a positive experience
with government.

Science, Technology, Engineering, and Math (STEM) Education: In support of the
President’s goal that the United States have the highest proportion of college graduates in the
world by 2020, the federal government will work with education partners to improve the quality
of STEM education at all levels to help increase the number of well-prepared graduates with
STEM degrees, the number of STEM teachers with corresponding undergraduate degrees, and
students’ access to quality STEM learning experiences.

Real time information on Cross-Agency Priority Goals is available at performance.gov.



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Management Performance

The Department continues to make a substantive commitment and investment in improving its
working capacity and infrastructure, to further leverage policy and programmatic aims to reform
the nation’s educational system. Goal 6 of the Strategic Plan (U.S. Department of Education
Capacity: Improve the organizational capacities of the Department to implement the Strategic
Plan) supports those aims by ensuring that the Department’s hiring, staffing, training, culture,
systems, and procedures enable the Department to deliver programs and resources in ways
that are faster, smarter, and better year after year. Thus, the commitment and the investments
are both short- and long-range in nature.

Examples of the Department’s strategies are seen in the thrust for greater employee
engagement, improvements and increases in diversity and inclusion, more rigorous hiring
targets and goals, and expansion of its leadership and knowledge management efforts in key,
cross-cutting areas, such as Information Technology (IT). These areas of focus also align with
the FY 2014 President’s Management Agenda. That agenda includes management goals
related to customer service, benchmarking and mission support, IT delivery, Open Data,
strategic sourcing, lab to market, shared services, and organizational culture.

The Department is making major efforts to bolster its impact in the people and culture element,
with an enterprise-wide workgroup on employee engagement, which is also leveraging and
piloting several strategic engagement initiatives throughout the Department. Those strategies
include formalized supervisor and peer recognition; intensive manager training and
development pilots; increased development and usage of telework policies and flexibilities; and
employee wellness, lifestyle balance, and volunteerism campaigns.

IT delivery is another area of focus to which the Department has committed a considerable
amount of resources. The Chief Information Officer has led a push for greater technology
innovation to improve the workload capacity for employees. Efforts to improve security, gain
efficiency in storage, improve network service and responsiveness, increase system speed, and
increase the footprint of Wi-Fi and other wireless and mobility solutions in the Department’s
facilities and for those working remotely, have significantly improved the employee computing
experience. These efforts have laid a foundation to clarify the Department’s ongoing needs and
provide a clear vision for how technology can better enable work over the next decade.

Another vital accomplishment and significant progress to date can be seen in the Department’s
emphasis on Cybersecurity, one of the President’s mission CAP goals. During FY 2014, the
Department significantly reduced the number of threats and risks, including security breaches.
In another effort, the technology group reported increases in electronic signature usage at
nearly 150 percent of its target. These advances in cybersecurity have been the result of steady
and focused strategies to proactively seek innovation as a major resource in the campaign to
improve.




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MANAGEMENT’S DISCUSSION AND ANALYSIS


                 Looking Ahead and Addressing Challenges
Quality education continues to be a vital component to the nation’s long-term economic
prosperity and recent economic gains. It is an investment that is valued highly by Americans, for
both present needs and its future promise. The Department continues to support state formula
grant programs while supporting the creation of models through competitive programs, including
Race to the Top, Promise Neighborhoods, Investing in Innovation (i3) grants, and a redesigned
School Improvement Grants program. Those commitments are bolstered by increasing the
extent to which evidence is used in programs and strategic decision-making.

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

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

Additionally, the Department will continue to strengthen the support systems necessary for all
students to succeed. This includes promoting preschool access for all students, K-12 strategic
reforms, and college affordability. Ultimately, the Department looks to create ladders of
opportunity to help all students.

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

Dramatically boosting completion rates for bachelor’s and associate’s degrees is essential for
the United States to successfully compete in a global economy. A college education is one of
the most important investments that Americans can make to increase the likelihood of higher
earnings and lower the risk of unemployment. Unfortunately, for many low- and middle-income
families, college is slipping out of reach. Over the past three decades the average tuition at a
public four-year college has more than tripled, while a typical family’s income has increased only
modestly. Lodging, food, books, and other related expenses have also increased dramatically.
More students than ever are relying on loans to pay for college.

Today, 71 percent of those earning a bachelor’s degree graduate with debt, which averages
$29,400. While most students are able to repay their loans, many feel burdened by debt,
especially as they seek to start a family, buy a home, launch a business, or save for retirement.
As such, the Department continues to focus on efforts intended to make college more affordable
and loan repayments more manageable by implementing initiatives from the President’s Value
and Affordability Agenda.

As noted elsewhere in this report, many of the Department’s initiatives depend, in large part, on
the extent to which states invest in higher education and on actions taken by states and
institutions. The Department will use its available resources and programs, administrative



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                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


action, bully pulpit, technical assistance, and ability to convene stakeholders to drive
collaboration and best practices to support states and institutions in making these investments.

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

The 2012 high school graduation rate—80 percent—is the highest in America’s history.
Graduation rate increases between 2008 and 2012 showed that an additional 100,000 Latino
students and 40,000 African-American students graduated from high school. That is 140,000
students of color alone with a better chance of getting a good job, owning their own home, and
supporting a family. Despite this achievement, the nation needs to push beyond 80 percent.

The adoption of internationally benchmarked college- and career-ready standards is the
foundation to improving educational outcomes for all students. These standards must be
coupled with high-quality formative and summative assessments to measure the extent to which
students are mastering the standards. A challenge facing the Department over the next two
years is supporting states both in their plans to implement these standards and aligned
assessments for all students, including English learners, students with disabilities, and low-
achieving students, and in their development and implementation of teacher and principal
evaluation and support systems. As noted elsewhere in this report, the Department aims to
address these challenges by developing and targeting technical assistance activities that will
increase state capacity to leverage limited resources and by identifying and disseminating
information on promising practices.

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

Every child should have the opportunity for a great start in life. According to recent Civil Rights
Data Collection data, big opportunity gaps start at the very beginning of formal education.
Nationwide, 60 percent of school districts have public preschool programs but 40 percent—
almost 7,000 districts—do not offer these programs. Nearly 10,000 school districts today have a
public, district-based preschool program, but more than half of those districts—57 percent—
offer only part-day programs, and barely half of the school districts that have public preschool
programs make them available to all children within the district.

Additionally, the most recent State Preschool Yearbook from the National Institute for Early
Education Research (NIEER) shows fewer than 30 percent of 4-year-olds in the U.S. are
enrolled in state-funded preschool programs; and for those who do attend, 41 percent were
served in programs that met fewer than half of the NIEER quality standards benchmarks.

The Department will keep working to improve access to high-quality early learning through our
implementation of the Preschool Development Grants, support of RTT-ELC state systems of
early learning, Enhanced Assessment Grants (EAG) grantees that are designing and




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MANAGEMENT’S DISCUSSION AND ANALYSIS


developing KEAs, and continued close partnership with the Department of Health and Human
Services.

Expanding access to high-quality early learning programs and constructing, testing, and
implementing assessment of early learning outcomes are challenging and resource-dependent
initiatives. States are beginning the development of valid and reliable measures for KEAs. New
measures and systems are expensive, and budget cuts could impact deployment. Additionally,
EAG grantees that are consortia experience challenges in the coordination across states due to
differences in their policies and procedures.

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

Identifying opportunity gaps is the first step that schools and districts should take to address
educational inequities. The real power of the Civil Rights Data Collection lies not just in the
numbers themselves, but in the real-world impact they can have when coupled with courage
and the will to change. These data are providing—and will continue to provide—important
markers and starting points for discussion within the Department and among education
stakeholders. Further, as noted previously, the Department is focused on supporting innovation
and efforts that demonstrate growth in student achievement.

Multiple Department programs aim to improve educational equity, and it can be challenging to
ensure states and districts coordinate these efforts. Key barriers and challenges to aligning the
work of these programs and improving education equity include sustaining reforms in schools
after their SIG program grants end; addressing capacity challenges at state, district, and school
levels; focusing on comprehensive turnaround efforts at the state and district level beyond the
SIG program; ensuring alignment between SIG, RTT, ESEA flexibility, and other programs and
initiatives; and accessing quality and completeness data that would allow others to define
success.

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

Through its mix of grants, contracts, and internal analytic work, the Department continues to
support the use of research methods and rigorous study designs that provide robust evidence.
Using evidence to award competitive grants requires a shift in culture and capacity-building
across the Department and in the field. Although the Department utilizes Regional Educational
Laboratories (RELs), the Education Resource Information Center (ERIC), and the What Works
Clearinghouse (WWC) to make information about research and evaluation available, the
Department has limited resources to provide technical assistance to applicants and grantees to
support their understanding of evidence standards and conducting rigorous evaluations that
would produce evidence of effectiveness.

In addition to its efforts to increase evidence-based decision-making, the Department also
considers transparency, participation, and collaboration as vital to the success of improving the
quality and accessibility of education. An important component of that commitment is the
Department’s Open Government Plan. The Department’s 2014 Open Government Plan
provides an update on existing programmatic work and highlights of Department actions to


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                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


achieve its goals of improving student achievement and educational opportunity. The flagship
initiatives of the Plan include: A fully operational beta version of the Education Data Inventory, a
repository of data that the Department collects; early public participation and input in policy- and
rule-making; a new version of the Federal Registry for Educational Excellence (FREE), making
it easier to find digital teaching and learning resources; the Integrated Student Experience (ISE)
initiative, resulting in increased financial aid awareness and a simplified application and
servicing experience; and the Department’s Disclosure Review Board (ED-DRB), which is
responsible for the review and approval of the disclosure avoidance protections used to protect
privacy in the Department’s public data releases. Additionally, the Department launched an
initiative called the Future Ready District Pledge, a commitment by superintendents to develop
and implement technology plans that would support a transition to digital learning.

Goal 6. U.S. Department of Education Capacity: Improve the
organizational capacities of the Department to implement the
Strategic Plan.

Recently, the Department participated in a series of government-wide benchmarking exercises,
as a part of the President’s Management Agenda, and the findings have been very useful in key
areas, including technology, real estate, and financial management. As a result of the findings,
comparisons to other agencies and identifying best practices, the Department’s technology
group has identified the potential for greater savings in certain service sectors and found
objective confirmation for many of its cost-saving plans for the future, such as driving down
specific network and e-mail storage costs by transitioning services to the cloud environment.
This effort has also caused the Department to consider additional shared service arrangements
that may help garner more efficiency and lower costs.

A major effort is underway to freeze and reduce the Department’s occupied space footprint in
facilities across the nation. The Department’s space modernization initiative will help identify
and gain efficiencies in various ways, including consolidating employees and work groups into
existing spaces as facilities’ leases expire, for projected rent savings; reducing space
requirements and related rental per square footage rates; increasing the extent and impact of
telework and other mobility strategies; and redesigning workspaces to reduce the need for
isolated, individual spaces while adding more collaborative ones.

In financial management, the Department continues to assess its business processes to ensure
that they are effectively and efficiently supporting the mission. Those activities include process
re-engineering, enhanced automation, strengthening internal controls, and expanding the use of
shared service solutions where practical.

Finally, greater emphasis and development for the management and supervision cadre is an
essential element of the strategy to build capacity and infrastructure. The Department continues
to explore and identify innovative training and development opportunities, while also looking for
tangible ways to gauge the effectiveness and return on the investments in this area. Getting this
approach right is critically important to the Department’s ability to sustain consistent and
continuous improvement, as well as safeguarding the ability to manage the knowledge,
expertise, and functionality to deliver on its strategic mission and goals.

Reporting on Progress Made on Strategic Goals and Objectives: The Department
continues to use tools and processes, such as quarterly performance reviews, to assess
progress toward achieving strategic goals and outcomes. Additionally, the Organizational
Performance Review contributes to the Department’s data-driven performance discussions by



FY 2014 Agency Financial Report—U.S. Department of Education                                       21
MANAGEMENT’S DISCUSSION AND ANALYSIS


serving as a tool for principal offices to improve their efficiency and effectiveness by focusing on
operational priorities and initiatives at the principal office level.

To support the tracking and reporting of progress against the goals and objectives, the
Department provides regular updates to its data profile on performance.gov for key policy and
programmatic topics. The effective implementation of the Department’s strategic and Agency
Priority Goals will depend, in part, on the effective use of high-quality and timely data, including
evaluations and performance measures, throughout the lifecycle of policies and programs.

In addition, the Department’s success in achieving its strategic goals is closely tied to its
capacity and funding. In addressing capacity, the Department will invest in the continuous
improvement of its workforce and employ comprehensive risk management to ensure prudent
use of public dollars by mitigating risk through increased oversight and support of grantees and
contractors.

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

Accomplishing all of the priorities will require strong coordination and collaboration from
Department staff working with Congress, partners at the state and local levels, and other
stakeholders. This includes meeting numerous legislative challenges and acting under fiscal
constraints that may impact the Department’s ability to provide the necessary incentives and
resources to increase quality, transparency, and accountability.




22                                                         FY 2014 Agency Financial Report—U.S. Department of Education
                                                                   MANAGEMENT’S DISCUSSION AND ANALYSIS


                                                  Financial Highlights

Introduction

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

The Department consistently produces accurate and timely financial information. Our financial
statements and notes are prepared in accordance with accounting principles generally accepted
in the United States for federal agencies issued by the Federal Accounting Standards Advisory
Board (FASAB) and the format and content specified by OMB, specifically in Circular No. A-136,
Financial Reporting Requirements. The financial statements, notes, and underlying business
processes, systems, and controls are audited by an independent accounting firm with audit
oversight provided by the Office of Inspector General (OIG). For thirteen consecutive years, the
Department has earned an unmodified (or “clean”) audit opinion. The financial statements and
notes for FY 2014 are on pages 54–94 and the Independent Auditors’ Report begins on
page 102.

Management’s assessment of internal controls in accordance with OMB Circular A-123,
Management's Responsibility for Internal Control, provides the Department with credibility to
external stakeholders and confidence that financial data produced from its underlying financial
systems and business processes are complete, accurate, and reliable. This ensures the
financial statements conform with applicable federal reporting requirements, the Department
has trustworthy financial information for good decision-making, and various reports can be
produced for both internal and external stakeholders timely and accurately. Additionally, the
Department’s complete and accurate financial data enables it to provide transparency pertaining
to the finances of the Department and how it is spending federal funds. Further information on
management’s assessment of internal controls can be found in the Analysis of Controls,
Systems, and Legal Compliance section that begins on page 37.

Trend Analysis

The tables below summarize trend information about components of the Department’s financial
condition. The Table of Key Measures summarizes trend information about components of the
Department’s Consolidated Balance Sheet and Statement of Net Cost, and provides a snapshot
of the Department’s financial condition as of September 30, 2014, compared with the end of
fiscal years 2013–2010, displaying assets, liabilities, net position, and net cost, rounded to the
millions. The Summarized Financial Data graphic presents the table data, as a graph, for an
alternate display over the same five consecutive years, rounded to the billions.




FY 2014 Agency Financial Report—U.S. Department of Education                                         23
MANAGEMENT’S DISCUSSION AND ANALYSIS



                                                                       Table of Key Measures
                                                              As of September 2014, 2013, 2012, 2011, and 2010
                                                                                   (Dollars in Millions)

                                                                              % Change
                                                                                                    FY 2014             FY 2013           FY 2012             FY 2011            FY 2010
                                                                             FY 14 / FY 13

                                                                             Consolidated Balance Sheet

  Fund Balance with Treasury                                                      -9%           $       98,696 $           108,732 $          121,993 $           114,085 $          132,259
  Credit Program Receivables, Net                                                +12%                  923,545             826,684            673,488             530,491            367,904
  Other                                                                          +3%                     1,685               1,642              1,446               1,966              3,501
 Total Assets                                                                    +9%                 1,023,926             937,058            796,927             646,542            503,664
  Debt                                                                           +13%                  966,671             852,432            715,303             547,108            374,335
  Liabilities for Loan Guarantees*                                               +0%                       -                   -                1,037              10,025             14,479
  Other                                                                          -13%                   14,549              16,783             15,432              20,824             27,248
 Total Liabilities                                                               +13%                  981,220             869,215            731,772             577,957            416,062
  Unexpended Appropriations                                                        -7%                   66,447             71,371              72,686              71,729            94,371
  Cumulative Results of Operations                                               -573%                  (23,741)            (3,528)             (7,531)             (3,144)           (6,769)
 Total Net Position                                                               -37%          $        42,706 $           67,843 $            65,155 $            68,585 $          87,602

           * The presentation of the FY 2012 and earlier Liability for Loan Guarantees is in the Liability section of the Department’s Balance Sheet; however, the presentation of the same
           FY 2013 and FY 2014 liability is in the Credit Program Receivables, Net Balance Sheet line item, due to its negative value.


                                                                        Consolidated Statement of Net Cost


  Gross Cost                                                                     +83%           $      112,295 $            61,353 $            89,263 $           89,910 $          116,953
  Earned Revenue                                                                  +8%                  (29,125)            (26,881)            (25,490)           (20,397)           (17,279)
 Total Net Cost of Operations                                                    +141%          $       83,170 $            34,472 $            63,773 $           69,513 $           99,674




                                                                 Summarized Financial Data
                                                                                  (Dollars in Billions)

                                                                        2014       2013       2012       2011      2010


                                                                                                                                                                       $1,024
                                                                                                                                                             $937
                      Total Assets                                                                                                         $797
                                                                                                                         $647
                                                                                                       $504

                                                                                                                                                                  $981
                                                                                                                                                    $869
                  Total Liabilities                                                                                                $732
                                                                                                                 $578
                                                                                             $416

                                               $43
                                                 $68
              Total Net Position                 $65
                                                 $69
                                                   $88

                                                  $83
                                              $34
     Total Net Cost of Operations               $64
                                                 $70
                                                   $100




24                                                                                                              FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                            MANAGEMENT’S DISCUSSION AND ANALYSIS


Balance Sheet

The Consolidated Balance Sheet presents, as of a specific point in time (the end of the fiscal
year), the Department’s total assets, total liabilities, and the difference, which is known as net
position.

                    Comparison of Department's
                         Comparison              Assets,Assets
                                      of Department's    Liabilities & Net Position
                                                                & Liabilities
                                    for
                                     forFiscal
                                         FiscalYears
                                               Years 2010–2014
                                                     2009-2013
                                                               (Dollars
                                                                (Dollars in Billions)
                                                                         in Billions)
                   $1,200


                   $1,000


                     $800


                     $600


                     $400


                     $200


                        $-
                                   FY 2010                FY 2011                 FY 2012            FY 2013        FY 2014
         Total Assets             $503,664               $646,542                 $796,927           $937,058      $1,023,926
         Total Liabilities        $416,062               $577,957                 $731,772           $869,215       $981,220
         Total Net Position        $87,602                $68,585                 $65,155            $67,843        $42,706
    Table amounts are presented in millions



Analysis of Assets

The Department’s assets totaled $1,023.9 billion as of September 30, 2014, an increase of
$86.8 billion, or approximately 9 percent, over the FY 2013 balance of $937.1 billion. The vast
majority of the increase in assets relates to Credit Program Receivables, which increased to
$923.5 billion, a 12 percent increase over $826.7 billion in FY 2013. The Credit Program
Receivables increase is largely the result of Direct Loan disbursements for new loan originations
and Federal Family Education Loan (FFEL) consolidations, net of borrower principal and
interest collections, which increased the net portfolio for Direct Loans by $99.4 billion
($134 billion was disbursed for consolidated loans). The Department’s total assets are
composed of Fund Balance with Treasury, Credit Program Receivables, and Other Assets.




FY 2014 Agency Financial Report—U.S. Department of Education                                                                    25
MANAGEMENT’S DISCUSSION AND ANALYSIS



                                             Composition of Assets
                                                     ($1,023.9 Billion)




                                                                                           Other Assets
                                                                                              0.2%
                                                                                                      Fund Balance with
                                                                                                          Treasury
                                                                                                            9.6%




               Credit Program
                Receivables
                   90.2%




      Assets as of September 30, 2014 and 2013
      (Dollars in Millions)                                                                 2014                      2013


      Fund Balance with Treasury                                                 $        98,696           $      108,732

      Credit Program Receivables                                                        923,545                   826,684

      Other Assets*                                                                        1,685                      1,642


      Total Assets                                                               $ 1,023,926               $      937,058



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




26                                                                        FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                    MANAGEMENT’S DISCUSSION AND ANALYSIS


The chart below displays the composition of funds held with the U.S. Treasury (Fund Balance
with Treasury) as of September 30, 2014. 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. Other Funds include special funds that include fees collected on delinquent or
defaulted Perkins loans, and trust funds for the hurricane relief activities.

                                              Fund Balance
                                                      Chartwith
                                                           TitleTreasury
                                                               ($98.7 Billion)




                                                                                                  $29.1


                                                                                                          General Funds
                                                                                                          Revolving Funds
                                                                                                          Other Fund Types *


               $69.5



                                                                                                   $0.1




*Other fund types include special, trust, clearing, non-entity deposit, and receipt funds.




FY 2014 Agency Financial Report—U.S. Department of Education                                                                   27
MANAGEMENT’S DISCUSSION AND ANALYSIS


The chart below presents the Department’s Credit Program Receivables, Net, for fiscal years
2010–2014. This chart shows the Department’s shift in the composition of its loans receivable
portfolio from guaranteed loans to direct loans. FFEL Guaranteed Loans Receivable have not
grown during the past five years because no new loans were made after June 30, 2010. This
shift in the loans receivable portfolio is consistent with the provisions of the SAFRA Act, which
required the transition from the Department guaranteeing the loans provided by the private
sector to full direct lending. As a result, there has been a pronounced increase in the Direct
Loan Program. This change caused the Department’s Credit Program Receivables to grow
significantly, from $368 billion in FY 2010 to $924 billion in FY 2014, a $556 billion increase.




Analysis of Liabilities

Liabilities of the Department totaled $981.2 billion as of September 30, 2014, an increase of
$112.0 billion, or approximately 13 percent over the FY 2013 balance of $869.2 billion. Total
Liabilities are primarily made up of Debt resulting from Credit Program Receivable activity. The
increase is principally related to current year borrowing from Treasury for the Direct Loan and
FFEL Programs that provided funding for Direct Loan disbursements and FFEL Program
payment of credit program outlays. Current year borrowing, net of repayments, resulted in a
$114 billion increase in Debt.

The FY 2010–2012 Liability for Loan Guarantees are presented in the liability section of the
Department’s Balance Sheet, while the FY 2013 and FY 2014 Liability for Loan Guarantees are
presented in the Credit Program Receivables because they resulted in a negative liability.




28                                                        FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                  MANAGEMENT’S DISCUSSION AND ANALYSIS



                                                  Composition of Liabilities
                                                               ($981.2 Billion)




                                                                                                   Guaranty Agency Federal
                                                                                                    Funds Due to Treasury
                                                                                                            0.1%
                                                                                                        Accrued Grant Liability
                                                                                                                0.3%
                                                                                                      Other Liabilities
                                                                                                           0.7%

                                                                                               Accounts Payable
                                                                                                    0.4%
                  Debt
                 98.5%




       Liabilities as of September 30, 2014 and 2013
       (Dollars in Millions)                                                                2014                   2013


       Accounts Payable                                                             $      4,001        $         4,129

       Debt                                                                              966,671              852,432

       Guaranty Agency Federal Funds Due to Treasury                                       1,471                  1,482

       Accrued Grant Liability                                                             2,487                  2,170

       Other Liabilities                                                                   6,590                  9,002


       Total Liabilities                                                            $    981,220        $     869,215




FY 2014 Agency Financial Report—U.S. Department of Education                                                                  29
MANAGEMENT’S DISCUSSION AND ANALYSIS


The Department borrows from Treasury to fund the disbursement of new loans and the payment
of credit program outlays. The majority of the increase in Debt is due to the borrowing used to
fund the Direct Loan Program. During FY 2014, Debt increased 13 percent from $852 billion in
the prior year to $967 billion. The new financing was used to disburse new loans and make
negative subsidy transfers to the Treasury’s General Fund.

                                           Debt& Earned Revenue
                        Net Cost by Gross Cost
                               for Fiscal Years 2010–2014
                                          (Dollars in Billions)


     $1,000
                                                                                                     $967
      $900

                                                                             $852
      $800

      $700                                           $715

      $600

      $500                        $547


      $400
                 $374
      $300

      $200

      $100

        $-
                 2010            2011                2012                    2013                    2014


Statement of Net Cost

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

Net Cost of Operations totaled $83.2 billion for the year ended September 30, 2014, a
$48.7 billion or 141 percent increase compared to the prior year of $34.5 billion. This increase is
primarily due to an upward subsidy re-estimate of $30.2 billion for the Direct Loan Program. The
primary drivers of the upward subsidy re-estimate are changes in the type and availability of
repayment plans and increases in default rates.




30                                                                FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                         MANAGEMENT’S DISCUSSION AND ANALYSIS



                                             Gross
                                        Net Cost    Cost &Cost
                                                 by Gross   Earned Revenue
                                                                & Earned Revenue
                                               for Fiscal Years 2010–2014
                                                                (Dollars in Billions)

         $120
                       $117
                                                                                                           $112
         $100


                                               $90                      $89
           $80



           $60
                                                                                            $61


           $40


                                                                                                                     $29
                                                                                   $25               $27
           $20
                                                          $20
                                  $17


           $-
                           2010                    2011                     2012              2013            2014
                                                           Gross Cost      Earned Revenue


The Department’s gross cost is composed of the cost of credit programs, grant programs, and
operating costs. The cost of credit programs, also called subsidy, is derived using economic
models that project cash inflows (net of outflows) on a net present value basis. These estimated
cash flows are amortized, or spread out, over 30 years and are re-valued each year based on
current economic conditions. In practical terms, a negative subsidy occurs when the interest
rate and/or fees charged to the borrower are more than sufficient to cover the costs of the risk of
default. Costs are tracked through “cohort” accounting, segregating loans into annual cohorts
and tracking cost over the life of the loans. A cohort is a grouping of direct loans obligated or
loan guarantees committed by a program in the same year even if disbursements occur in
subsequent years. Factors such as interest rates charged to the borrower, interest rate on
Treasury debt, default rates, fees, the re-estimate of prior subsidy cost, and other costs impact
this calculation and help determine whether the result is positive or negative subsidy. In recent
history, the Department’s credit programs have had negative subsidy as a result of lending
interest rates being greater than the rates at which the Department borrows from Treasury.




FY 2014 Agency Financial Report—U.S. Department of Education                                                               31
MANAGEMENT’S DISCUSSION AND ANALYSIS


The following table presents a breakdown of net cost by program area for FY 2014 and
FY 2013.

                                                                  NetCost
                                                                  Net CostBy
                                                                           ByProgram
                                                                              ProgramFY
                                                                                      FY2013
                                                                                         2014&&FY
                                                                                                FY2012
                                                                                                   2013
                                                                                        (Dollars in Millions)




                                                         $1,982
 Program D
                                                         $1,920


                                                                                                     $17,086
 Program C
                                                                                                    $16,844


                                                                                                                         $23,387
     Program B
                                                                                                                                $24,846


                       $(9,138)                                                                                                                                              $40,715
 Program A



           $(10,000)        $(5,000)         $-            $5,000        $10,000        $15,000        $20,000        $25,000         $30,000         $35,000      $40,000        $45,000
                                                                            Program B:
                              Program A:                                                                                 Program C:                                   Program D:
                                                            Improve Preparation for College and Career
                 Increase College Access, Quality, and                                                   Ensure Effective Educational Opportunities     Enhance the Education System's Ability to
                                                           from Birth Through 12th Grade, Especially for
                             Completion                                                                                for All Students                          Continuously Improve
                                                                     Children with High Needs
        2014                      $40,715                                     $23,387                                      $17,086                                      $1,982
        2013                      $(9,138)                                   $24,846                                      $16,844                                       $1,920




As required by the GPRA Modernization Act of 2010, each of the Department’s reporting groups
and major program offices have been aligned with the strategic goals presented in the
Department’s FY 2014–2018 Strategic Plan.

The Department has more than 100 grant and loan programs (http://www2.ed.gov/programs/
gtep/gtep.pdf). In the Statement of Net Cost, they have been mapped to the Strategic Goals.
The three largest grant programs are Title I, Pell, and the Individuals with Disabilities Education
Act (IDEA) grants. Each of these programs’ FY 2014 appropriations exceeded $11 billion. In
addition to student loans and grants, the Department offers other discretionary grants under a
variety of authorizing legislation, awarded using a competitive process, and formula grants,
using formulas determined by Congress with no application process. Among the largest K-12
discretionary grants are RTT and the Teacher Incentive Fund. Among the largest formula grants
are Title I Grants to LEAs (Title I, Elementary and Secondary Education Act of 1965, as
amended) and IDEA grants.

As of FY 2014, disclosure of the American Recovery and Reinvestment Act of 2009 (ARRA) for
FY 2013 has been reclassified to present ARRA funding under the specific program offices
distributing the funding.




32                                                                                                                    FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                         MANAGEMENT’S DISCUSSION AND ANALYSIS



         Net Cost Program                                       Program Office                           Strategic Goal

Program A:                                                     Federal Student Aid                Goal 1: Postsecondary
Increase College Access, Quality,                                                                 Education, Career and
and Completion                                     Office of Postsecondary Education              Technical Education, and
                                                                                                  Adult Education.
                                                 Office of Career, Technical, and Adult           Increase college access,
                                                               Education                          affordability, quality, and
                                                                                                  completion by improving
                                                                                                  postsecondary education and
                                                                                                  lifelong learning opportunities for
                                                                                                  youths and adults.
Program B:                                        Office of Elementary and Secondary              Goal 2: Elementary and
Improve Preparation for College                                Education                          Secondary Education.
and Career from Birth Through 12th                                                                Improve the elementary and
Grade, Especially for Children with                   Hurricane Education Recovery                secondary education system’s
High Needs                                                                                        ability to consistently deliver
                                                                                                  excellent instruction aligned with
                                                                                                  rigorous academic standards
                                                                                                  while providing effective support
                                                                                                  services to close achievement
                                                                                                  and opportunity gaps, and
                                                                                                  ensure all students graduate high
                                                                                                  school college- and career-
                                                                                                  ready.
                                                                                                  Goal 3: Early Learning.
                                                                                                  Improve the health, social-
                                                                                                  emotional, and cognitive
                                                                                                  outcomes for all children from
                                                                                                  birth through 3rd grade, so that
                                                                                                  all children, particularly those
                                                                                                  with high needs, are on track for
                                                                                                  graduating from high school
                                                                                                  college- and career-ready.
Program C:                                       Office of English Language Acquisition           Goal 4: Equity.
Ensure Effective Educational                                                                      Increase educational
Opportunities for All Students                                 Office for Civil Rights            opportunities for underserved
                                                                                                  students and reduce
                                                     Office of Special Education and              discrimination so that all students
                                                          Rehabilitative Services                 are well-positioned to succeed.
Program D:                                           Institute of Education Sciences              Goal 5: Continuous
Enhance the Education System’s                                                                    Improvement of the U.S.
Ability to Continuously Improve                  Office of Innovation and Improvement             Education System.
                                                                                                  Enhance the education system’s
                                                                                                  ability to continuously improve
                                                                                                  through better and more
                                                                                                  widespread use of data, research
                                                                                                  and evaluation, evidence,
                                                                                                  transparency, innovation, and
                                                                                                  technology.

As further described in the Performance section of the MD&A, Strategic Plan Goals 1–5 are
sharply defined directives that guide the Department’s program offices to carry out the vision
and programmatic mission; the net cost programs can be specifically associated with these five
Strategic Goals. The Department also has a cross-cutting Strategic Plan Goal 6, U.S.
Department of Education Capacity, which focuses on improving the organizational capacities of
the Department to implement the Strategic Plan. As a result, the Department does not assign
specific programs to Strategic Plan Goal 6 for presentation in the Statement of Net Cost.



FY 2014 Agency Financial Report—U.S. Department of Education                                                                       33
MANAGEMENT’S DISCUSSION AND ANALYSIS



                           Composition of Net
                                          2014 Cost by Program
                                                ($83.2 Billion)


                                                                                $23.4
                                                                                28.1%




                                                                                                $17.1
                                                                                                20.5%
          $40.7
          49.0%




                                                                                      $2.0
                                                                                      2.4%



                            Program A    Program B      Program C        Program D



Statement of Changes in Net Position

The Consolidated Statement of Changes in Net Position reports the beginning net position, the
summary effect of transactions that affect net position, presented for a particular period of time
(for a fiscal year), and the ending net position. Net position consists of unexpended
appropriations and cumulative results of operations. Unexpended appropriations include
undelivered orders and unobligated balances for grant and administrative operations.
Cumulative results of operations represent the net difference since inception between
(1) expenses and (2) revenues and financing sources. Net Position of the Department totaled
$42.7 billion for the year ended September 30, 2014. This reflects a 37 percent decrease over
the net position of $67.8 billion from the prior fiscal year.

Statement of Budgetary Resources

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

The Department’s Budgetary Resources totaled $356.0 billion for the year ended September 30,
2014, decreasing from $359.9 billion, or approximately 1 percent from the prior year. Budgetary
resources are comprised of appropriated budgetary resources of $112.4 billion and
nonbudgetary credit reform resources of $243.6 billion. The nonbudgetary credit reform
resources are predominantly borrowing authority for the loan programs.



34                                                            FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                              MANAGEMENT’S DISCUSSION AND ANALYSIS



                                                            Budgetary Resources
                                                                      ($356.0 Billion)




                                        $25.7
                                        7.2%



                          $51.8                                                                                              $182.9
                          14.6%                                                                                              51.4%




                                                  $95.6
                                                  26.8%



                  Borrowing                                                         Appropriations

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



Gross outlays of the Department totaled $317.5 billion for the year ended September 30, 2014,
and consisted of appropriated budgetary resources of $99.9 billion and nonbudgetary credit
program funding of $217.6 billion.

                                                     Gross Outlays
                                                             Grossby Strategic Goal
                                                                   Outlays
                                                                       ($317.5
                                                                       ($209.0 billion)
                                                                               billion)


                                                                                                                                      Goal 1
                                                                                                                                      Goal 2
                                                                                                                                      Goal 3
                                                                                                                                      Goal 4
                                                                                                                                      Goal 5
         $275.1                                                                                                             $22.6
                                                                                                                                      Goal 6
         86.6%                                                                                                              7.1%




                                                                                                                                          $0.5
                                                                                                                                          0.2%
                                                                                                                             $16.9
                                                                                                                             5.3%

                                                                                                                     $1.9
                                                                                                                     0.6%
                                                                                                              $0.5
                                                                                                              0.2%



             *Strategic Goals are defined within the agency mission on pages 8–9.




FY 2014 Agency Financial Report—U.S. Department of Education                                                                                     35
MANAGEMENT’S DISCUSSION AND ANALYSIS


Gross Outlays are primarily comprised of credit program loan disbursements and claim
payments, and credit program subsidy interest payments to Treasury. Additional information on
the Department’s sources of funds and spending is shown in the Schedule of Spending on
page 137. This schedule includes sections titled, “What Money Is Available to Spend,” “How
Was the Money Spent,” and “Who Did the Money Go To.”

                   Limitations of the Financial Statements
Management has prepared the accompanying financial statements to report the financial
position and operational results for the U.S. Department of Education for FY 2014 and FY 2013,
pursuant to the requirements of Title 31 of the United States Code, section 3515(b).

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

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




36                                                        FY 2014 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


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

This section provides management assurances regarding compliance with the Federal
Managers’ Financial Integrity Act of 1982 (P.L. 97-255) (FMFIA) and Office of Management and
Budget (OMB) revisions to Circular A-123, Management’s Responsibility for Internal Control. It
also provides an analysis of the Department’s controls, systems, and legal compliance. In future
years, the Department will assess compliance in accordance with GAO’s recently updated
Standards for Internal Control in the Federal Government (Green Book).

Controls Framework and Analysis

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

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

OMB Circular A-123 implements the FMFIA and defines management’s responsibility for
internal control in federal agencies. Appendix A is intended to assist federal managers with
implementing a process for assessing the effectiveness of the entity’s internal control over
financial reporting. Appendix B prescribes policies and procedures to agencies regarding how to
maintain internal controls that reduce the risk of fraud, waste, and error in government charge
card programs. Appendix C acknowledges payment accuracy as a high-risk area and describes
the requirements for effective measurement and remediation of improper payments. Appendix D
defines new requirements for financial management systems in compliance with the Federal
Financial Management Improvement Act of 1996 (FFMIA).

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

Each principal office within the Department implements internal controls to achieve
programmatic goals, which include internal controls over operations, financial reporting, and
information technology systems. The internal control implementation begins with risk
assessments of the Department’s business processes and functional units. The SAT considers
the potential impact of risks using a multidimensional framework comprised of numerous risk
factors. The SAT then recommends processes and systems with high risk factors for more
frequent and rigorous internal control evaluations. Through the evaluations, Department offices
document key controls, evaluate and test the design and effectiveness of controls, and




FY 2014 Agency Financial Report—U.S. Department of Education                                     37
MANAGEMENT’S DISCUSSION AND ANALYSIS


communicate results to the SAT. Each office must develop and implement corrective action
plans for reported deficiencies. The CAT provides technical guidance throughout the process.

Federal Student Aid (FSA) maintains a parallel governance structure which is integrated within
the Department’s governance structure. FSA’s Chief Operating Officer chairs FSA’s SMC and
participates as a member of the Department’s SMC. FSA’s Chief Financial Officer chairs FSA’s
SAT and participates as a member of the Department’s SAT. The chair of FSA’s CAT
participates as a member of the Department’s CAT. Additional information on FSA’s internal
control framework, assessment of controls, and related assurances can be found in the Analysis
of Systems, Controls, and Legal Compliance section of the FY 2014 Federal Student Aid Annual
Report.




The Secretary designated the Chief Financial Officer (CFO) as the Senior Internal Control
Official for the Department. In this role, the office of the CFO develops and issues policies,
procedures, and reporting requirements; develops and provides training and technical
assistance; coordinates with the SMC, SAT, and CAT; leads selected internal control reviews;
and develops and maintains internal control and audit follow-up systems.




38                                                       FY 2014 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


Controls over Operations

The Department’s two primary areas of operation are the administration of grants and loans.
Other significant business activities include the management of contracts and interagency
agreements, human capital, facilities, and legal enforcement activities. To ensure the efficient
and effective implementation of these and other operations, including compliance with
applicable laws and regulations, the Department issued a directive, establishing in policy that all
managers are responsible for ensuring the development, maintenance, documentation,
evaluation, and improvement of internal control for the programs and administrative functions for
which they are responsible.

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

In FY 2014, the Department identified no material weaknesses in internal controls over the
effectiveness and efficiency of operations. The Department, however, continues to address
significant deficiencies (reportable conditions) in the administration of grants, loans, and other
program operations. These are consistent with OIG’s report, FY 2015 Management Challenges.
The Department is committed to continuous improvement, making corrections in accordance
with OIG findings. A summary of the OIG report is provided in the Other Information section.

Controls over Financial Reporting

Internal Control over Financial Reporting (ICOFR) is a subset of FMFIA, section 2. The
Department’s assessment of the effectiveness of internal control over financial reporting is
performed in accordance with Office of Management and Budget (OMB) circular A-123
Appendix A (A-123A). Additionally, the Department leverages the A-123A Implementation
Guidance, which describes the process for assessing internal control over financial reporting
and requires each agency to provide an annual statement of assurance on the effectiveness of
internal control over financial reporting as part of its overall FMFIA assurance statement.

Planning is a critical step in our assessment of the effectiveness of internal control over financial
reporting. Key decisions that drive the assessment are made during the planning phase.
Management decides on the materiality threshold, risk factors, the scope of the assessments
(e.g., which financial processes to review), and the test approach/methodology, as well as other
key decisions. Based on this assessment, management identifies specific areas to test. For any
deficiency identified during testing, OCFO staff work with process owners to facilitate the
development, approval, and implementation of Corrective Action Plans (CAPs). The Department
also considers the status of ongoing corrective actions and results of the financial statement
audit.

In FY 2014, OCFO strengthened its framework for internal control over financial reporting by
creating end-to-end process documentation for eight (8) significant business processes and
32 subprocesses that support the Department’s financial statements. OCFO also catalogued
controls within these processes.

Beginning in FY 2014, the Department strengthened its influence over key system controls that
impact financial management operations by making OCFO the new segment owner of the


FY 2014 Agency Financial Report—U.S. Department of Education                                       39
MANAGEMENT’S DISCUSSION AND ANALYSIS


Department’s Financial Management Line of Business (FMLoB). This change in ownership from
the Office of the Chief Information Officer to the OCFO was intended to help guide the FM
modernization strategy towards one that not only maintains tightly integrated Department-owned
systems, but also seeks to make prudent investments that will yield efficient and effective
financial management business processes, maximize shared services opportunities, maintain
strong internal controls within the systems, ensure compliance with pertinent laws and
regulations, and improve the reporting and analytic capabilities available to the FM workforce. In
addition, FMLoB investments will support the FM mission of the Department, which is to provide
objective financial data and performance information to its stakeholders, promote sound
financial management, support data-driven decision-making, and enhance financial reporting
and compliance activities.

The goals of the FMLoB Modernization Plan are:

    sustain and/or modernize Financial Management segment’s integrated hardware, software,
     and system support,
    optimize utilization of Treasury solutions and shared services where feasible,
    ensure that IT investments support effective and efficient Financial Management business
     processes,
    build analytic capacity to support data-driven decision-making and enhance financial
     reporting and compliance activities,
    pay the Department’s fair share of government-wide cost, and
    maximize interoperability between Financial Management Segment and other Department
     Segments.

In FY 2014, the Department identified no material weaknesses in internal controls over financial
reporting.

Controls over Systems

Internal controls over systems support all three internal control objectives: operations,
compliance, and financial reporting. In particular, system controls have a significant impact on
financial reporting and have been the Department’s and FSA’s primary area of focus for
addressing deficiencies in internal control.

The Department has garnered significant benefits from previous years’ audits and expects that
implementation of the recommendations presented in FY 2014 will further improve the
information security program by strengthening the associated management, technical, and
operational security controls.

Among the guidance applied by the Department in assessing controls over systems during
FY 2014 were FMFIA (section 4) and Appendix D of OMB A-123. We also assessed the
Department’s automated systems for compliance with key provisions of the Federal Financial
Management Improvement Act of 1996.

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




40                                                        FY 2014 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


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




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

Components of EDCAPS

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

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

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

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




FY 2014 Agency Financial Report—U.S. Department of Education                                     41
MANAGEMENT’S DISCUSSION AND ANALYSIS


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

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

2014 Internal Control Results

In FY 2014, system-level general controls tests were performed on all financially significant
systems similar to those performed in FY 2013.

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

EDCAPS is a moderate-impact application per Federal Information Processing Standards
(FIPS) 199, and is subject to the moderate-impact baseline required by National Institute of
Standards and Technology (NIST) Special Publication (SP) 800 53 Rev 4. Therefore, EDCAPS
uses the moderate-impact baseline as its minimum security control requirements.

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

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

Based on self-assessments and results of external audits in FY 2014, the Department has
concluded that there are no material weaknesses in control over systems. However, self-
assessments and external audits continue to identify control deficiencies in the areas of security
management, personnel security, access controls, and configuration management across these
systems. That is consistent with the management challenges OIG identified for IT security as
well as system development and implementation.




42                                                          FY 2014 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


Management Assurances

Based on internal control monitoring and the individual assurances provided by Principal
Operating Components, the Department is able to provide reasonable assurance that the
internal controls and financial management systems in effect during FY 2014 met the objectives
of both sections 2 and 4 of the FMFIA.

    FMFIA section 2 explains management’s responsibility for, and its role in, assessment of all
     internal controls, including controls over operations, compliance, and financial reporting.
    FMFIA section 4 relates to the Department’s analysis of systems, controls, and legal
     compliance related to financial reporting, and internal controls and system frameworks,
     including FMFIA, FFMIA, and the Federal Information Security Management Act (FISMA),
     as well as OMB Circular A-123, including Appendix D, as addressed in previous sections of
     this report.




FY 2014 Agency Financial Report—U.S. Department of Education                                     43
MANAGEMENT'S DISCUSSION AND ANALYSIS



Statement of Assurance

     The Department of Education's management is responsible for establishing and
     maintaining effective internal control and financial management systems that meet
     the objectives of the Federal Managers' Financial Integrity Act of 1982 (FMFIA) and
     OMB Circular A-123, Management's Responsibility for Internal Control. The
     Department evaluated its internal controls to support (1) effective and efficient
     programmatic operations, (2) compliance with applicable laws and regulations, and
     (3) reliable financial reporting.

     Internal Control Over Operations

     For all program areas, the Department provides reasonable assurance that internal
     controls were in place and operating to meet the objectives of section 2 of FMFIA, no
     material weaknesses were identified, and we were in compliance with applicable
     laws and regulations as of September 30, 2014, with the exception noted in the
     Legal Compliance section below.

     Internal Control Over Financial Reporting

     The Department conducted its assessment of the effectiveness of internal controls
     over financial reporting, which includes safeguarding of assets and compliance with
     applicable laws and regulations, in accordance with the requirements of Appendix A
     of OMB Circular A-123. The Department has reasonable assurance that internal
     controls over financial reporting as of September 30, 2014, were operating
     effectively and there were no material weaknesses in the design or operation of the
     controls.

     Internal Control Over Systems

     The Department is required to implement and maintain financial management
     systems that substantially comply with federal financial management systems
     requirements, federal accounting standards, and the United States Government
     Standard General Ledger at the transaction level. Based on the results of the
     Department's assessment in accordance with the requirements of section 4 of
     FMFIA, the Department's financial management systems substantially comply with
     the Federal Financial Management Improvement Act as of September 30, 2014.

     Notwithstanding the aforementioned assertions, I acknowledge that we have internal
     control- and compliance-related issues, such as those identified by our auditors and
     the management challenges raised by the Office of Inspector General in other
     sections of this report. We are committed to resolving them.




                                       \LQ~ 

                                         Arne Duncan 

                                       November 14, 2014 





44                                                      FY 2014 Agency Financial Report-U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


Financial Management Systems Strategy

The Federal Information Security Management Act of 2002 (FISMA) requires federal agencies
to implement a mandatory set of processes and system controls designed to ensure the privacy,
confidentiality, integrity, availability, and security of system-related information. The Department
has been implementing a multiyear process to improve its reporting activities, as described in
the Controls over Systems section.

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

Currently, the FMSS resides on an Oracle database and uses the Oracle Federal Financial
Software Version 11.5.10 (11i). Oracle has issued version Release 12 of its software as a
replacement for the 11i version. Release 12 has passed the necessary testing and is federally
compliant for financial management. The Department is examining solutions for migrating to the
Release 12 version. The Office of Management and Budget (OMB) has directed agencies to
explore the possibility of utilizing a federal shared service provider (FSSP) for financial
management before implementing or migrating to new versions of financial applications. During
FY 2015, the Department expects to explore potential options pertaining to using an FSSP
solution for core financial management services.

Legal Compliance

Compliance with applicable laws and regulations is an integral component of the Department’s
internal control program. This section is a partial list of those applicable laws for which the
Department’s internal controls ensure compliance, with the exceptions noted below.

Federal Financial Management Improvement Act (FFMIA)—requires that agency financial
management systems comply with federal financial management systems requirements,
applicable federal accounting standards and the U.S. Standard General Ledger (USSGL) at the
transaction level in order to provide uniform, reliable, and more useful financial information.
Agencies are required to assess and report on whether these systems comply with FFMIA on
an annual basis.

The results of tests of FFMIA section 803(a) requirements disclosed no instances in which the
Department’s financial management systems did not substantially comply with (1) federal
financial management systems requirements, (2) applicable federal accounting standards, or
(3) the USSGL at the transaction level.




FY 2014 Agency Financial Report—U.S. Department of Education                                      45
MANAGEMENT’S DISCUSSION AND ANALYSIS


The Improper Payments Information Act of 2002, as amended by the Improper Payments
Elimination and Recovery Act of 2010 (IPERA) and the Improper Payments Elimination
and Recovery Improvement Act of 2012 (IPERIA)—requires agencies to annually report
information on improper payments to the President and Congress, focusing on risk
assessments, statistical sampling, and corrective actions. The statute requires OMB to provide
guidance to agencies on reimbursement of costs between agencies, retention and timely
destruction of records, and prohibiting the duplication and disclosure of records, including
creation and maintenance of a Do Not Pay list to facilitate federal agencies’ review of payment
or award eligibility for purposes of identifying and preventing improper payments.

Federal Information Security Management Act of 2002 (FISMA)—requires federal agencies
to implement a mandatory set of processes and system controls designed to ensure the
confidentiality, integrity, and availability of system-related information.

Prompt Payment Act of 1982—requires federal agencies to make timely payments to vendors.
When a payment is not processed within the timeframes specified in the act, payment of interest
is required.

Anti-Deficiency Act of 1870 (with amendments in 1982)—prohibits federal agencies from
obligating or expending federal funds in advance or in excess of an appropriation,
apportionment, or certain administrative subdivisions of those funds. The act also prohibits
agencies from accepting voluntary services.

Debt Collection Improvement Act of 1996—enacted into law as part of the Omnibus
Consolidated Rescissions and Appropriations Act of 1996. The primary purpose of the Debt
Collection Improvement Act (DCIA) is to increase the collection of nontax debts owed to the
federal government.

       The Digital Accountability and Transparency Act (DATA Act), Public Law 113-101,
       enacted on May 9, 2014, amended the DCIA to require referral of delinquent debt to the
       Department of Treasury’s Offset Program within 120 days. The Department is in
       communication with Treasury regarding implementation of the DCIA, and is working to
       determine the best course of action, including, as needed, modifications to existing
       regulations and/or systems and processes, to fully comply with the DCIA. This
       determination of noncompliance with this provision of the DCIA does not represent a
       material weakness in the Department’s internal controls.

Federal Credit Reform Act of 1990—enacted to provide a more realistic picture of the cost of
U.S. government direct loans and loan guarantees. The purposes of Title V of the act are to
measure more accurately the costs of federal credit programs; place the cost of credit programs
on a budgetary basis equivalent to other federal spending; encourage the delivery of benefits in
the form most appropriate to the needs of beneficiaries; and improve the allocation of resources
among credit programs and between credit and other spending programs (See Notes 1 and 6 in
the Financial Section).

The Cash Management Improvement Act of 1990—The purpose of this law is to improve the
transfer of federal funds between the federal government, the states, territories, and the District
of Columbia. The law focuses on two recurrent intergovernmental issues: states drawing federal
funds in advance of need; and the federal government providing late grant awards to states.

Single Audit Act of 1984—The Single Audit Act of 1984 (with amendment in 1996) and OMB
Circular A-133 (“Audits of State, Local Governments, and Non-Profit Organizations”) provide



46                                                        FY 2014 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


audit requirements for ensuring that grant funds to state, local, and tribal governments, colleges,
universities and other nonprofit organizations (nonfederal entities) are expended properly.

Government Performance and Results Act of 1993 as amended by the GPRA
Modernization Act of 2010—The GPRA of 1993 established strategic planning, performance
planning, and reporting as a framework for agencies to communicate progress in achieving their
missions. The GPRA Modernization Act of 2010 established important changes to these existing
requirements.

The foundations of GPRA are: (1) agencies are required to develop five-year strategic plans that
must contain a mission statement as well as long-term, results-oriented goals covering each of
its major functions; (2) agencies are required to prepare annual performance plans that
establish the performance goals for the applicable fiscal year, a brief description of how these
goals are to be met, and a description how these performance goals can be verified; and (3)
agencies must prepare annual performance reports that review the agency’s success or failure
in meeting its targeted performance goals.

Elementary and Secondary Education Act—The current reauthorization of ESEA is the No
Child Left Behind Act of 2001. It emphasizes equal access to education, sets high standards for
academic performance, and demands a rigorous level of accountability from schools and
districts. ESEA authorizes an important group of education programs administered by the
states. These programs support eligible schools and districts eager to raise the academic
achievement of struggling learners, and address the complex challenges that arise among
students who live with disability, mobility problems, learning difficulties, poverty, transience, and
the need to learn a second language.

Higher Education Opportunity Act of 2008—intended to strengthen the educational
resources of our colleges and universities and to provide financial assistance for students in
postsecondary and higher education. It increased federal money given to universities, created
scholarships, and gave low-interest loans for students.

Individuals with Disabilities Education Act of 2004—governs how states and public agencies
provide early intervention, special education, and related services to children with disabilities.

General Education Provisions Act—provides general administrative requirements that govern
the implementation of all Department grant programs.

Department of Education Organization Act—established the Department, defines its mission,
and sets out key components of its organizational structure.




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MANAGEMENT’S DISCUSSION AND ANALYSIS




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48                                                      FY 2014 Agency Financial Report—U.S. Department of Education
Financial Section
FINANCIAL SECTION



                Message From the Chief Financial Officer
Our FY 2014 Agency Financial Report (AFR) demonstrates the
Department of Education’s firm commitment to financial
management excellence. In compiling the AFR this year, we
made a concerted effort to provide information at a high level
while providing web links for many details.

We made the Notes more reader-friendly and tried to build on
our success in telling the financial story of the Department, for
which we were recognized by the Association of Government
Accountants in 2013 as the best in federal government.

FY 2014 was not easy. We overcame a multi-week
government shutdown and tight operating budgets for the
entire year, while still carrying out many complex programs.
Despite these challenges, I am extremely pleased that we have
attained our 13th consecutive unmodified or “clean” opinion. The consistency in our
accounting and reporting is a tribute to the excellent work of our employees and contract
partners.

The Department is the smallest of the 15 cabinet-level agencies in terms of government
staff, with approximately 4,100 employees, yet we have large financial responsibilities
whether the measure is assets, obligations, or outlays.

The balance sheet of the Department now exceeds $1 trillion. Our largest asset is a
portfolio of student loans. Our employees and contractors collect principal and interest on
the loans, provide services to students and schools, and implement ways to make it easier
for borrowers to repay.

The second largest item on the balance sheet is grants to states, most of which go toward
elementary and secondary education and get awarded on a legislated formula basis.

The third biggest item is student aid, which helps students and families pay for college
through Pell Grants, Work Study, and other campus-based programs.

The Department also carries out competitive grant programs to promote innovation,
performs research, collects education statistics, and enforces civil rights statutes.

Our annual spending is another way of looking at the financial picture. We made almost
$200 billion in new obligations in FY 2014. This included approximately $100 billion in new
student loans, $32 billion in Pell Grants for needy college students, $14.5 billion for Title I of
the Elementary and Secondary Education Act, $11.5 billion for the Grants to States under
the Individuals with Disabilities Education Act, and $2.5 billion for Improving Teacher
Quality State Grants. With all those large activities and over 100 smaller programs, we still
spent less than 1 percent of the annual obligations on administrative costs.




50                                                     FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                      FINANCIAL SECTION
                                                               MESSAGE FROM THE CHIEF FINANCIAL OFFICER

In addition to providing an unmodified opinion for FY 2014, our auditors reported that there
were no material internal control weaknesses and no material instances of noncompliance
with applicable laws and regulations. They did, however, note one item involving the Debt
Collection Improvement Act as discussed in the Legal Compliance section of the MD&A.

We realize that our administrative processes and internal controls are never perfect. There
are always areas in need of improvement, including those identified by our independent
auditors in their report and by the Office of Inspector General in its assessment of our
management challenges. We are working on these issues and on issues related to our
internal self-assessments in areas such as grant monitoring, IT systems, and management
of student loan repayments. We will use their suggestions and findings as guides as we
strive for continuous improvement.




Thomas P. Skelly
Delegated to perform the functions and duties of the Chief Financial Officer
November 14, 2014




FY 2014 Agency Financial Report—U.S. Department of Education                                         51
FINANCIAL SECTION



                          About the Financial Section
In FY 2014, the Department has expended significant time and energy to make the
Financial Section more reader-friendly for a general audience. Because so many details in
the Section are critical to understanding the report, we placed a high priority on cutting
through jargon and repetitive statements, and used graphic examples to illustrate points of
discussion. While we recognize each year that there is always room for improvement, we
believe that this year’s Financial Section represents our most user-friendly report to date. In
addition, we have put in place a team-based continuous improvement process with reviews
by our readers. As such, we welcome comments from readers to further improve the report
and make it easier to use.

The Financial Section is the AFR’s center core. It begins with a concise statement of the
Department’s financial condition and extends to the Notes to the Financial Statements,
which provide specific detail, including calculations and assumptions in key areas, as
defined in OMB Circular A-136. The section also presents the Report of the Independent
Auditors as well as supplemental information on human capital and program outcomes.

In FY 2014, we revamped the Notes to make them more reader-friendly. We did so using a
peer review process among teams of content experts within the Department, benchmarking
against other agencies, and with a careful eye to plain language to attract a broader
audience to material that is often viewed as the fine print, but is, in reality, the assumptions
under which the Department operates.

Financial Statements

Financial statements included are: Consolidated Balance Sheet As of September 30, 2014
and 2013, Consolidated Statement of Net Cost For the Years Ended September 30, 2014
and 2013, Consolidated Statement of Changes in Net Position For the Years Ended
September 30, 2014 and 2013, and Combined Statement of Budgetary Resources For the
Years Ended September 30, 2014 and 2013.

Notes to the Financial Statements

Note 1. Summary of Significant Accounting Policies
Note 2. Non-Entity Assets
Note 3. Fund Balance with Treasury
Note 4. Accounts Receivable
Note 5. Cash and Other Monetary Assets
Note 6. Credit Programs for Higher Education: Credit Program Receivables, Net and
        Liabilities for Loan Guarantees
Note 7. Property and Equipment, Net and Leases
Note 8. Other Assets
Note 9. Accounts Payable
Note 10. Debt
Note 11. Other Liabilities
Note 12. Accrued Grant Liability
Note 13. Net Position
Note 14. Intragovernmental Cost and Exchange Revenue by Program
Note 15. Interest Expense and Interest Revenue
Note 16. Statement of Budgetary Resources



52                                                    FY 2014 Agency Financial Report—U.S. Department of Education
                                                                             FINANCIAL SECTION
                                                                   ABOUT THE FINANCIAL SECTION

Note 17. Reconciliation of Net Cost of Operations to Budget
Note 18. Incidental Custodial Collections
Note 19. Contingencies

Required Supplementary Information

This section contains the Combining Statement of Budgetary Resources For the Years
Ended September 30, 2014 and 2013.

Required Supplementary Stewardship Information

Stewardship Expenses summarize spending and stakeholder relationships with state and
local educational agencies. Stewardship resources are substantial investments by the
federal government for the long-term benefit of the nation. Because costs of stewardship
resources are treated as expenses in the financial statements in the year the costs are
incurred, they are reported as RSSI to highlight the benefit nature of the costs and to
demonstrate accountability.

Boosting completion rates for bachelor’s and associate degrees is essential for Americans
to compete in a global economy. Education is the stepping stone to higher living standards
for American citizens, and is vital to economic growth. Economic outcomes, such as wage
and salary levels, have historically correlated with the educational attainment of individuals
and the skills employers expect of those entering the labor force.

Report of the Independent Auditors

The results of the audit of the Department’s financial statements for FY 2014 and FY 2013
to comply with the Chief Financial Officers Act of 1990, as amended, are presented to be
read in conjunction with the Financial Section in its entirety. The Department’s Office of
Inspector General contracted with the independent certified public accounting firm of
CliftonLarsonAllen, LLP to audit the financial statements of the Department as of
September 30, 2014 and 2013, and for the years then ended.




FY 2014 Agency Financial Report—U.S. Department of Education                                 53
FINANCIAL SECTION
FINANCIAL STATEMENTS



                                 United States Department of Education
                                      Consolidated Balance Sheet
                                         As of September 30, 2014 and 2013
                                                   (Dollars in Millions)



                                                                                     FY 2014                       FY 2013
Assets:
 Intragovernmental:
      Fund Balance with Treasury (Note 3)                                      $             98,696           $          108,732
      Accounts Receivable (Note 4)                                                                3                            2
      Other Intragovernmental Assets (Note 8)                                                    55                           22
  Total Intragovernmental                                                                    98,754                      108,756

     Cash and Other Monetary Assets (Note 5)                                                 1,471                         1,482
     Accounts Receivable, Net (Note 4)                                                         136                           121
     Credit Program Receivables, Net (Note 6)                                              923,545                       826,684
     Property and Equipment, Net (Note 7)                                                        7                             2
     Other Assets (Note 8)                                                                      13                            13
Total Assets (Note 2)                                                          $         1,023,926            $          937,058


Liabilities:
 Intragovernmental:
      Accounts Payable (Note 9)                                                $                 1            $                2
      Debt (Note 10)                                                                       966,671                       852,432
      Guaranty Agency Federal Funds Due to Treasury (Note 5)                                 1,471                         1,482
      Other Intragovernmental Liabilities (Note 11)                                          6,413                         8,855
  Total Intragovernmental                                                                  974,556                       862,771

     Accounts Payable (Note 9)                                                                4,000                         4,127
     Accrued Grant Liability (Note 12)                                                        2,487                         2,170
     Other Liabilities (Note 11)                                                                177                           147
Total Liabilities (Note 11)                                                    $           981,220            $          869,215

     Commitments and Contingencies (Note 19)

Net Position:
     Unexpended Appropriations (Note 13)                                       $             66,447           $           71,371
     Cumulative Results of Operations (Note 13)                                             (23,741)                       (3,528)
Total Net Position (Note 13)                                                   $             42,706           $           67,843

Total Liabilities and Net Position                                             $         1,023,926            $          937,058



The accompanying notes are an integral part of these statements.




54                                                                     FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                                 FINANCIAL SECTION
                                                                                             FINANCIAL STATEMENTS



                                         United States Department of Education
                                          Consolidated Statement of Net Cost
                                    For the Years Ended September 30, 2014 and 2013
                                                               (Dollars in Millions)




                                                                                           FY 2014            FY 2013
Program Costs:



   Increase College Access, Quality, and Completion
   Gross Costs                                                                         $       69,746     $       17,606
   Earned Revenue                                                                             (29,031)           (26,744)
        Net Program Costs                                                                      40,715             (9,138)


   Improve Preparation for College and Career from Birth
   Through 12th Grade, Especially for Children with High Needs
   Gross Costs                                                                         $       23,402     $      24,871
   Earned Revenue                                                                                  (15)             (25)
        Net Program Costs                                                                      23,387            24,846


   Ensure Effective Educational Opportunities for All Students
   Gross Costs                                                                         $       17,101     $      16,870
   Earned Revenue                                                                                  (15)             (26)
        Net Program Costs                                                                      17,086            16,844


   Enhance the Education System’s Ability to Continuously Improve
   Gross Costs                                                                         $        2,046     $          2,006
   Earned Revenue                                                                                  (64)                 (86)
        Net Program Costs                                                                       1,982                1,920



Net Cost of Operations (Notes 14 & 17)                                                 $       83,170     $      34,472



The accompanying notes are an integral part of these statements.




FY 2014 Agency Financial Report—U.S. Department of Education                                                    55
  FINANCIAL SECTION
  FINANCIAL STATEMENTS



                              United States Department of Education
                         Consolidated Statement of Changes in Net Position
                             For the Years Ended September 30, 2014 and 2013
                                                   (Dollars in Millions)


                                                                  FY 2014                                      FY 2013
                                                         Cumulative                                   Cumulative
                                                         Results of    Unexpended                     Results of    Unexpended
                                                         Operations Appropriations                    Operations Appropriations



Beginning Balances:
 Beginning Balances                                  $         (3,528)     $        71,371        $        (7,531)     $        72,686

Budgetary Financing Sources:
 Appropriations Received                             $             -       $        95,293        $             -      $        90,993
 Appropriations Transferred – In/Out                               -                    76                      -                     -
 Other Adjustments (Rescissions, etc.)                             -                  (619)                     -                (2,824)
 Appropriations Used                                          99,674               (99,674)                89,484              (89,484)
 Nonexchange Revenue                                              12                     -                     10                     -
 Donations and Forfeitures of Cash and Cash
 Equivalents                                                          2                    -                     1                    -

Other Financing Sources:
 Imputed Financing from Costs Absorbed by Others     $              36     $               -      $             34     $              -
 Negative Subsidy Transfers, Downward Subsidy
 Re-Estimates, and Other                                      (36,767)                    -               (51,054)                    -
Total Financing Sources                              $         62,957      $         (4,924)      $        38,475      $         (1,315)


Net Cost of Operations:                              $        (83,170)     $               -      $       (34,472)     $              -



Net Change:                                          $        (20,213)     $         (4,924)      $         4,003      $         (1,315)


       Ending Balances (Note 13)                     $       (23,741)       $       66,447        $        (3,528)     $        71,371




The accompanying notes are an integral part of these statements.




  56                                                                  FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                                              FINANCIAL SECTION
                                                                                                          FINANCIAL STATEMENTS


                                        United States Department of Education
                                      Combined Statement of Budgetary Resources
                                      For the Years Ended September 30, 2014 and 2013
                                                                  (Dollars in Millions)


                                                                                        FY 2014                         FY 2013
                                                                                          Non-Budgetary                   Non-Budgetary
                                                                                           Credit Reform                   Credit Reform
                                                                                             Financing                       Financing
                                                                               Budgetary     Accounts           Budgetary    Accounts
Budgetary Resources:
  Unobligated Balance, Brought Forward, October 1                             $     16,207      $    11,315     $   12,622     $         18,993
  Recoveries of Prior Year Unpaid Obligations                                        1,131           97,274          1,191               35,425
  Other Changes in Unobligated Balance (+ or -)                                       (372)         (99,811)          (428)             (39,189)
  Unobligated Balance from Prior Year Budget Authority, Net                   $     16,966      $     8,778     $   13,385     $         15,229
  Appropriations (Discretionary and Mandatory)                                      95,004              581         88,380                    5
  Borrowing Authority (Discretionary and Mandatory) (Note 16)                            -          182,860                -            195,185
  Spending Authority from Offsetting Collections
  (Discretionary and Mandatory)                                                        473           51,347           779                46,976
Total Budgetary Resources (Note 16)                                           $    112,443      $   243,566     $ 102,544      $        257,395

Status of Budgetary Resources:
  Obligations Incurred (Note 16)                                              $     97,606      $   233,457     $   86,337     $        246,080
  Unobligated Balance, End of Year:
       Apportioned                                                                  12,125               69        13,700                     -
       Unapportioned                                                                 2,712           10,040         2,507                11,315
  Total Unobligated Balance, End of Year                                            14,837           10,109        16,207                11,315
Total Status of Budgetary Resources (Note 16)                                 $    112,443      $   243,566     $ 102,544      $        257,395

Change in Obligated Balance:
  Unpaid Obligations
    Unpaid Obligations, Brought Forward, October 1                            $      59,630     $    161,747    $    65,057    $     172,230
    Obligations Incurred                                                             97,606          233,457         86,337          246,080
    Outlays (Gross) (-)                                                             (99,886)        (217,614)       (90,573)        (221,138)
    Recoveries of Prior Year Unpaid Obligations (-)                                  (1,131)         (97,274)        (1,191)         (35,425)
    Unpaid Obligations, End of Year                                           $      56,219     $     80,316    $    59,630    $     161,747
  Uncollected Payments
    Uncollected Payments, Federal Sources, Brought Forward,
    October 1 (-)                                                             $           (3)   $        (25)   $        (2)   $            (26)
    Change in Uncollected Payments, Federal Sources (+ or -)                               2              (1)            (1)                  1
    Uncollected Payments, Federal Sources, End of Year (-)                    $           (1)   $        (26)   $        (3)   $            (25)
  Memorandum (Non-add) Entries
    Obligated Balance, Start of Year (+ or -)                                 $     59,627      $   161,722     $   65,055     $        172,204
    Obligated Balance, End of Year (+ or -)                                   $     56,218      $    80,290     $   59,627     $        161,722

Budget Authority and Outlays, Net:
  Budget Authority, Gross (Discretionary and Mandatory)                       $     95,477      $   234,788     $   89,159     $        242,166
  Actual Offsetting Collections (Discretionary and Mandatory) (-)                     (624)         (97,463)          (935)             (72,672)
  Change in Uncollected Customer Payments from Federal Sources
  (Discretionary and Mandatory) (+ or -)                                                 2               (1)            (1)                   1
  Budget Authority, Net (Discretionary and Mandatory)                         $     94,855      $   137,324     $   88,223     $        169,495
  Outlays, Gross (Discretionary and Mandatory)                                $     99,886      $   217,614     $   90,573     $        221,138
  Actual Offsetting Collections (Discretionary and Mandatory) (-)                      (624)        (97,463)           (935)            (72,672)
  Outlays, Net (Discretionary and Mandatory)                                         99,262         120,151          89,638             148,466
  Distributed Offsetting Receipts (-) (Note 16)                                     (39,652)              -         (48,725)                  -
  Agency Outlays, Net (Discretionary and Mandatory) (Note 16)                 $      59,610 $       120,151     $    40,913 $           148,466


The accompanying notes are an integral part of these statements.




   FY 2014 Agency Financial Report—U.S. Department of Education                                                                    57
FINANCIAL SECTION




                  Notes to the Financial Statements
         For the Years Ended September 30, 2014 and 2013


Note 1. Summary of Significant Accounting Policies
Reporting Entity and Programs
The United States (U.S.) Department of Education (the Department), a cabinet-level agency of
the Executive Branch of the U.S. Government, was established by Congress under the
Department of Education Organization Act (Public Law 96-88), which became effective on
May 4, 1980. The mission of the Department is to promote student achievement and
preparation for global competitiveness by fostering educational excellence and ensuring equal
access. The Department is responsible for administering federal student loan and grant
programs, as discussed below.
Federal Student Loan Programs. The Department administers direct loan, loan guarantee
and other student aid programs to help students and their families finance the cost of
postsecondary education. These include the William D. Ford Federal Direct Loan Program
(Direct Loan) and the Federal Family Education Loan Program (FFEL).
The Direct Loan Program, added to the Higher Education Act of 1965 (HEA) in 1993 by the
Student Loan Reform Act of 1993, authorizes the Department to make loans through
participating schools for eligible undergraduate and graduate students and their parents. The
FFEL Program, authorized by the HEA, operated through state and private nonprofit guaranty
agencies which provided 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 that was included in the Health Care and Education Reconciliation Act of 2010 (HCERA),
effective July 1, 2010, stated that no new FFEL loans would be made.
The Department also administers loans for the Historically Black Colleges and Universities
(HBCU) Capital Financing Program, the Health Education Assistance Loan Program (HEAL),
the Teacher Education Assistance for College and Higher Education Grant Program (TEACH),
along with low-interest loans to institutions of higher education for the building and renovating
of their facilities through the facilities loan programs.
Grant Programs. The Department administers numerous grant programs, including: grants to
state and local entities for elementary and secondary education; special education and
rehabilitative services grants; grants to support institutions of higher education; educational
research and improvement grants; grants to assist low-income and first-generation college
students to prepare for and transition into college; grants to improve our global awareness and
competitiveness; and fellowships for college and graduate students. Among the largest K-12
discretionary grants are the Federal TRIO Program (TRIO), Race to the Top, and Teacher
Incentive Fund. Among the largest formula grant programs are the Title I grants issued under
the Elementary and Secondary Education Act of 1965, as amended, grants issued under the
Individuals with Disabilities Education Act (IDEA), and grants to local education agencies.
The Department also administers the Federal Pell Grant (Pell Grant) Program to provide need-
based grants that provide access to postsecondary education for low-income undergraduate
and certain post-baccalaureate students.




58                                                       FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                  FINANCIAL SECTION
                                                                 NOTES TO THE FINANCIAL STATEMENTS


Major Program Offices
The Department has three major program offices that administer loan and grant programs.
They are:
          Federal Student Aid (FSA)
          Office of Elementary and Secondary Education (OESE)
          Office of Special Education and Rehabilitative Services (OSERS)
     In addition, there are other offices that administer programs, including the Office of Career,
     Technical, and Adult Education (OCTAE), Office of Postsecondary Education (OPE),
     Institute of Education Sciences (IES), Office of English Language Acquisition (OELA),
     Office of Innovation and Improvement (OII), Office of Management, Office for Civil Rights
     (OCR), and Hurricane Education Recovery (HR) activities. (See Notes 12 and 14)
Basis of Accounting and Presentation
These financial statements have been prepared to report the financial position, net cost of
operations, changes in net position, and budgetary resources of the Department, as required
by the Chief Financial Officers Act of 1990 and the Government Management Reform Act of
1994. The financial statements were prepared from the books and records of the Department,
in accordance with Generally Accepted Accounting Principles (GAAP) accepted in the U.S. for
federal entities, issued by the Federal Accounting Standards Advisory Board (FASAB), and the
Office of Management and Budget (OMB) Circular No. A-136, Financial Reporting
Requirements, as revised. These financial statements are different from the financial reports
prepared by the Department pursuant to OMB directives that are used to monitor and control
the use of budgetary resources. FSA also issues audited stand-alone financial statements
which are included in their annual report.
The Department’s financial statements should be read as a component of the U.S.
Government, a sovereign entity. One of the many implications of this is that the liabilities
cannot be liquidated without legislation providing resources and legal authority to do so.
The accounting structure of federal agencies is designed to reflect both accrual and budgetary
accounting transactions. Under the accrual method of accounting, revenues are recognized
when earned and expenses are recognized when a liability is incurred, without regard to receipt
or payment of cash. Budgetary accounting facilitates compliance with legal constraints and
controls over the use of federal funds.
Intradepartmental transactions and balances have been eliminated from the consolidated
financial statements.
Intragovernmental Transactions
The Department’s financial activities are interlinked and dependent upon the financial activities
of the centralized management functions of the federal government. Due to financial regulation
and management control by OMB and the U.S. Department of Treasury (Treasury), operations
may not be conducted and financial positions may not be reported as they would if the
Department were a separate, unrelated entity.
Accounting for Federal Credit Programs
The purpose of the Federal Credit Reform Act of 1990 (FCRA) is to record the lifetime cost of
direct loans and loan guarantees at the time the loan is disbursed. Under the FCRA, subsidy
cost is estimated using the net present value of future cash flows to and from the Department.
In accordance with the FCRA, credit programs either estimate a cost to the government (a


FY 2014 Agency Financial Report—U.S. Department of Education                                      59
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

“positive” subsidy to borrowers), breakeven (zero subsidy cost), or estimate a negative subsidy
cost. Credit programs have negative subsidies when the estimated cost to the government of
providing credit is less than the estimated collections from repayments, interest, and fees, on a
present value basis. The estimates are affected by the cost of borrowing (at Treasury’s rates)
and the estimated risk of default. In practical terms, a negative subsidy occurs when the
interest rate and/or fees charged to the borrower are more than sufficient to cover the costs of
the risk of default.
The cost of direct loan and loan guarantee programs are budgeted and tracked by the fiscal
year in which the loan award is made or the funds committed. Such a grouping of loans or
guarantees are referred to as a “cohort.” A cohort is a grouping of direct loans obligated or loan
guarantees committed by a program in the same year even if disbursements occur in
subsequent years.
In order to account for the change in the net present value of the loan portfolio over time, the
subsidy cost is “amortized” each year. Amortization of subsidy is interest expense on debt with
Treasury minus interest income from borrowers and interest on uninvested fund balance with
Treasury. It is calculated as the difference between interest revenue and interest expense.
Amortized amounts are recognized as an increase or decrease in interest income. Amortization
accounts for the differences in interest rates, accruals, and cash flows over the life of a cohort,
insuring that cost is reflected in subsidy estimates and re-estimates. 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.
The FCRA establishes the use of Program, Financing, and General Fund Receipt Accounts for
loan guarantees committed and direct loans obligated after September 30, 1991. 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.
Appropriations for new subsidy and subsidy re-estimates are received in Program Accounts
and transferred to the Financing Accounts. Financing Accounts borrow funds from Treasury,
make direct loan disbursements, pay claims on guaranteed loans, collect principal and interest
from borrowers, collect fees and other program income, pay interest to Treasury on borrowings,
collect interest from Treasury on uninvested funds, and collect funds for positive subsidy or
transfer negative subsidy to a General Fund Receipt Account. The Financing Account receives
the subsidy cost payment from the Program Account. The General Fund Receipt Account, a
budget account, is 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. The budgetary resources and activities for these accounts
are presented separately in the Combined Statement of Budgetary Resources (SBR) and the
Budget of the United States Government and are excluded from the determination of the
budget deficit or surplus. Program accounts are classified as either budgetary or non-budgetary
in the Combined SBR. The budgetary accounts include the Program and Liquidating Accounts,
while Financing Accounts are non-budgetary. FCRA establishes Liquidating Accounts for
activity relating to any loan guarantees committed or direct loans obligated before October 1,
1991.
Components of subsidy costs for loans and guarantees include defaults (net of recoveries);
contractual payments to third-party private loan collectors who receive a set percentage of
amounts collected; and, as an offset, origination and other fees collected. For direct loans, the
difference between interest rates incurred by the Department on its borrowings from Treasury
and interest rates charged to particular borrowers is also subsidized (or may provide an offset
to subsidy if the Department’s rate is less). The corresponding interest subsidy in loan
guarantee programs is the payment of interest supplements to third-party lenders in order to
pay down the interest rates on loans made by those lenders.

60                                                        FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                FINANCIAL SECTION
                                                               NOTES TO THE FINANCIAL STATEMENTS

As of July 1, 2014, consistent with the Consolidated Appropriations Act, 2014 (P.L. 113-76), the
Department of Health and Human Services (HHS) transferred all HEAL program loans to the
Department. This was accomplished through Treasury guidance on obligated and non-
obligated balance transfers. (See Note 6)
Budget Authority
Budget authority is the authorization provided by law for the Department to incur financial
obligations that will result in outlays. The Department’s budgetary resources include
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.
Borrowing authority is an indefinite budgetary resource authorized under the FCRA. This
resource, when realized, finances the unsubsidized portion of the Direct Loan, FFEL, TEACH,
and other loan programs. In addition, borrowing authority is requested in advance of expected
collections to cover negative subsidy cost. Treasury prescribes the terms and conditions of
borrowing authority and lends to the 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. Treasury calculates a different interest rate to be
used for each loan cohort. 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.
Authority to borrow from Treasury provides most of the funding for disbursements made under
the Direct Loan Program, FFEL, TEACH, and other loan programs. Subsidy and administrative
costs of the programs are funded by appropriations. Borrowings are repaid using collections
from borrowers, fees, and interest on uninvested funds.
Unobligated balances represent the cumulative amount of budget authority that is not obligated
and that remains available for obligation under law, unless otherwise restricted. Resources
expiring at the end of the fiscal year remain available for five years, but only for upward
adjustments of prior year obligations, after which they are canceled and may not be used.
Resources that have not expired at year-end are available for new obligations, as well as
upward adjustments of prior-year obligations. Funds are appropriated on an annual, multi-year,
or no-year basis. Appropriated funds shall expire on the last day of availability and are no
longer available for new obligations. Amounts in expired funds are unavailable for new
obligations, but may be used to adjust previously established obligations.
Permanent Indefinite Budget Authority. The Direct Loan, FFEL, TEACH, and other loan
programs have permanent indefinite budget authority through legislation. Parts B and D of the
HEA pertain to the existence, purpose, and availability of permanent indefinite budget authority
for these programs.
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 in accordance with
congressional budgeting rules. (See Note 16)




FY 2014 Agency Financial Report—U.S. Department of Education                                   61
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

Use of Estimates
Department management is required to make certain estimates while preparing consolidated
financial statements in conformity with GAAP. These estimates are reflected in the assets,
liabilities, net cost, and net position of the financial statements and may differ from actual
results. The Department’s estimates are based on management’s best knowledge of current
events, historical experiences, and other assumptions that are believed to be reasonable under
the circumstances. Significant estimates reported on the financial statements include allocation
of Department administrative overhead costs, annual credit program re-estimates and
modifications of subsidy cost (general program administration cost), as well as grant liability
and advance accruals. (See Notes 6, 12, and 14)
Entity and Non-Entity Assets
Assets are classified as either entity or non-entity assets. Entity assets are those that the
Department has authority to use for its operations. Non-entity assets are those held by the
Department but are not available for use in its operations. Non-entity assets are offset by
liabilities to third parties and have no impact on net position. The Department combines its
entity and non-entity assets on the Balance Sheet and discloses its non-entity assets in the
notes. (See Note 2)
Fund Balance with Treasury
Fund Balance with Treasury includes five types of 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: (1) General funds consist of expenditure
accounts used to record financial transactions arising from congressional appropriations, as
well as receipt accounts; (2) Revolving funds, which include Financing Accounts, manage the
activity of self-funding programs whether through fees, sales, or other income; (3) Special
funds are receipts from sources that are authorized by law for a specific purpose—these
receipts are available for expenditure for special programs; (4) Trust funds are used for the
acceptance and administration of funds contributed from public and private sources and
programs and are in cooperation with other federal and state agencies or private donors; and
(5) Other funds include deposit funds, receipt funds, and clearing accounts. Treasury
processes cash receipts and cash disbursements for the Department. The Department’s
records are reconciled with Treasury’s. (See Note 3)
Accounts Receivable
Accounts Receivable are amounts due to the Department from the public and other federal
agencies. Receivables from the public result from overpayments to recipients of grants and
other financial assistance programs, as well as disputed costs resulting from audits of
educational assistance programs. Amounts due from federal agencies result from reimbursable
agreements entered into by the Department with other agencies to provide various goods and
services. Accounts receivable are reduced to net realizable value by an allowance for
uncollectible amounts. The estimate of an allowance for loss on uncollectible accounts is based
on the Department’s experience in the collection of receivables and an analysis of the
outstanding balances.
Accounts Receivable are established as claims to cash or other assets against other entities.
At the Department, accounts receivable originate through legal provisions or program
requirements to return funds due to noncompliant program administration, regulatory
requirements, or individual service obligations. Further, the Department utilizes the opportunity
to reduce the accounts receivable balances through the Treasury referral program.
The Department calculates the allowance for loss from uncollectable accounts receivable by
applying a collection rate based on historical trends against gross accounts receivable. The

62                                                       FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                 FINANCIAL SECTION
                                                                NOTES TO THE FINANCIAL STATEMENTS

collection rate is determined based on a rolling average of actual collection rates for the prior
seven fiscal years. (See Note 4)
Cash and Other Monetary Assets
Cash and Other Monetary Assets consist of guaranty agency reserves that represent the
federal government’s interest in the net Federal Fund assets of state and nonprofit FFEL
Program guaranty agencies. Guaranty agency Federal Fund reserves are classified as non-
entity assets with the public 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 U.S. and are reflected in the Budget of the United States
Government. Ownership by the federal government is independent of the actual control of the
assets.
The Department disburses funds to a guaranty agency. A guaranty agency, through its Federal
Fund, pays lender claims and pays default aversion fees into its own Operating Fund. The
Operating Fund is the property of the guaranty agency and is used 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 Fund
through a statutory recall or agency closures represent capital transfers and are credited to the
Department’s Fund Balance with Treasury account. (See Note 5)
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 FCRA. 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 an “allowance for subsidy.” The difference
between the gross amount and the allowance for subsidy is the present value of the cash flows
to, and from, the Department that are expected from receivables over their projected lives.
Similarly, liabilities for loan guarantees are valued at the present value of the cash outflows
from the Department less the present value of related inflows. The estimated present value of
net long-term cash outflows of the Department for subsidized costs is net of recoveries, interest
supplements, and offsetting fees. The Department also values all pre-1992 loans, loan
guarantees, and direct loans at their net present values. If the Liability for Loan Guarantees is
positive, the amount is reported as a component of Credit Program Receivables, Net.
The Liability for Loan Guarantees presents the net present value of all future cash flows from
currently insured FFEL loans including claim payments, interest assistance, allowance
payments, and recoveries from assigned loans. Guaranteed loans that default are initially
turned over to guaranty agencies for collection. Defaulted FFEL loans are accounted for and
reported in the financial statements under credit reform rules, similar to direct loans, although
they are legally not direct student loans. Negative balances are reported as a component of
Credit Program Receivables, Net. Credit Program Receivables, Net includes default FFEL
loans owned by the Department and held by the Department or guaranty agencies. In most
cases, after approximately four years, defaulted guaranteed loans not in repayment are turned
over to the Department for collection.
Credit program receivables for activities under the temporary loan purchase authority include
the present value of future cash flows related to purchased loans. Subsidy was transferred,
which may have been prior to loan purchase, and is recognized as subsidy expense on the

FY 2014 Agency Financial Report—U.S. Department of Education                                        63
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

Balance Sheet and 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. (See Note 6)
Property and Equipment, Net and Leases
The Department capitalizes single items of property and equipment with a cost of $50,000 or
more that have an estimated useful life of two years or more. Additionally, the Department
capitalizes bulk purchases of property and equipment with an aggregate cost of $500,000 or
more. A bulk purchase is defined as the purchase of like items related to a specific project, or
the purchase of like items occurring within the same fiscal year that have an estimated useful
life of at least two years. Property and equipment are depreciated over their estimated useful
lives using the straight-line method of depreciation. Internal Use Software meeting the above
cost and useful life criteria is also capitalized. Internal Use Software is either purchased off the
shelf, internally developed, or contractor developed solely to meet the Department’s needs.
The Department adopted the following useful lives for its major classes of depreciable property
and equipment:
                                 Depreciable Property and Equipment
                                                      (In Years)

                                        Major Class                                                    Useful Life
     Information Technology, Internal Use Software, and Telecommunications Equipment                         3
     Furniture and Fixtures                                                                                  5


The Department leases buildings, along with information technology and telecommunications
equipment, as part of a contractor-owned, contractor-operated services contract. Lease
payments associated with the equipment have been determined to be operating leases and, as
such, are expensed as incurred. The non-cancellable lease term is one year, with the
Department holding the right to extend the lease term by exercising additional one-year
options. (See Note 7)
Liabilities
Liabilities represent actual and estimated amounts to be paid as a result of transactions or
events that have already occurred. However, no liabilities can be paid by the Department
without budget authority. Liabilities for which an appropriation has not been enacted are
classified as liabilities not covered by budgetary resources, and there is no certainty that an
appropriation will be enacted. The government, acting in its sovereign capacity, can abrogate
liabilities that arise from activities other than contracts. FFEL Program and Direct Loan
Program liabilities are entitlements covered by permanent indefinite budget authority. (See
Note 11)
Accounts Payable
Accounts Payable include amounts owed by the Department for goods and services received
from other entities, as well as payments not yet processed. (See Note 9)
Debt
The Department borrows from Treasury to provide funding for the Direct Loan, FFEL, TEACH,
and other loan programs. The liability to Treasury from borrowings represents unpaid principal
at year-end. The Department repays the principal based on available fund balances. Interest on
the debt is calculated and paid at fiscal year-end using rates set by Treasury. These are rates
generally fixed based on the rate for 10-year Treasury securities. In addition, the Federal
Financing Bank (FFB) holds bonds issued by a designated bonding authority, on behalf of the

64                                                                 FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                  FINANCIAL SECTION
                                                                 NOTES TO THE FINANCIAL STATEMENTS

Department, for the HBCU Capital Financing Program. The Department reports the
corresponding liability for full payment of principal and accrued interest on bonds as a payable
to the FFB. (See Note 10)
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 program. 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. (See Note 12)
Other Liabilities
Other Liabilities include liabilities in miscellaneous receipts and capital transfers. Liabilities in
miscellaneous receipt accounts are recorded for downward subsidy re-estimates that are
accrued at year end and for amounts of future capital transfers from Liquidating Accounts.
Miscellaneous receipt accounts are a mechanism used by Treasury to facilitate the elimination
of receivables and payables within the government, and the Department follows the guidance
for using miscellaneous receipt accounts in recording specific events. Upon execution of a
downward re-estimate or an actual capital transfer, the liabilities in the miscellaneous receipt
accounts are satisfied and removed from the general ledger. Liabilities in miscellaneous receipt
accounts are unfunded liabilities. (See Note 11)
Net Cost
Net cost consists of gross costs and earned revenue. Gross costs and earned revenue are
classified as intragovernmental (exchange transactions between the Department and other
entities within the federal government) or with the public (exchange transactions between the
Department and non-federal entities).
Net program costs are gross costs less revenue earned from activities. The Department
determines gross cost and earned revenue by tracing amounts back to the specific program
office. Administrative overhead costs of funds unassigned are allocated based on full-time
employee equivalents of each program. (See Note 14)
Interest Expense and Interest Revenue
The Department accrues interest receivable and records interest revenue on performing Direct
Loans and FFEL loans purchased by the Department. The Department recognizes interest
income when interest is accrued on loans to the public for the Direct Loan, FFEL, and TEACH
Programs. FFEL Financing and Liquidating Accounts accrue interest as part of allowance for
subsidy. Interest due from borrowers is accrued at least monthly and is satisfied upon collection
or capitalization into the loan principal.
Interest expense and interest revenue are equal for all credit programs due to subsidy
amortization. If interest revenue is greater than expense or interest expense is greater than
revenue, the difference is recorded to revenue with the offset to allowance for subsidy. Subsidy
amortization is required by the FCRA and accounts for the difference between interest accruals
and interest cash flows. (See Note 15)
Net Position
Net position consists of unexpended appropriations and cumulative results of operations.
Unexpended appropriations include undelivered orders and unobligated balances, except for
amounts in Financing Accounts, Liquidating Accounts, and trust funds. Cumulative results of



FY 2014 Agency Financial Report—U.S. Department of Education                                       65
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

operations represent the net difference since inception between (1) expenses and (2) revenues
and financing sources. (See Note 13)
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 in either the Civil
Service Retirement System (CSRS), a defined benefit plan, or the Federal Employees
Retirement System (FERS), a defined benefit and contribution plan. For CSRS employees, the
Department contributes a fixed percentage of pay.
FERS consists of Social Security, a basic annuity plan, and the Thrift Savings Plan. The
Department and the employee contribute to Social Security and the basic annuity plan at rates
prescribed by law. In addition, the Department is required to contribute to the Thrift Savings
Plan a minimum of 1 percent per year of the basic pay of employees covered by this system,
match voluntary employee contributions up to 3 percent of the employee’s basic pay, and
match one-half of contributions between 3 percent and 5 percent of the employee’s basic pay.
For FERS employees, the Department also contributes the employer’s share of Medicare.
Contributions for CSRS, FERS, and other retirement benefits are insufficient to fund the
programs fully and are subsidized by the Office of Personnel Management (OPM). The
Department imputes its share of the OPM subsidy, using cost factors provided by OPM, and
reports the full cost of the programs related to its employees.
Federal Employees’ Compensation Act. The Federal Employees’ Compensation Act (FECA)
provides income and medical cost protection to covered federal civilian employees injured on
the job, employees who have incurred work-related occupational diseases, and beneficiaries of
employees whose deaths are attributable to job-related injuries or occupational diseases. The
FECA Program is administered by the U.S. Department of Labor (DOL), which pays valid
claims and subsequently seeks reimbursement from the Department for these paid claims.
The FECA liability consists of two components. The first component is based on actual claims
paid and recognized by the Department as a liability. Generally, the Department reimburses
DOL within two to three years once funds are appropriated. The second component is the
estimated liability for future benefit payments based on unforeseen events, such as death,
disability, medical, and miscellaneous costs as determined by DOL annually. (See Note 11)
Reclassifications
Certain reclassifications were made to the Fiscal Year (FY) 2013 financial statements and
notes to conform to the current year presentation. These changes had no effect on total assets,
liabilities, net position, net cost of operations, or budgetary resources. The American Recovery
and Reinvestment Act of 2009 (ARRA) funding is winding down, thereby diminishing the
materiality of the program. Therefore, the separate ARRA presentation on the financial
statements and note disclosures has been removed. The Consolidated Statement of Net Cost
and related note disclosures for FY 2013 have been reclassified to present ARRA funding
under the specific program offices distributing the funding. (See Notes 12 and 14)




66                                                      FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                                                     FINANCIAL SECTION
                                                                                                    NOTES TO THE FINANCIAL STATEMENTS

Note 2. Non-Entity Assets
As of September 30, 2014 and 2013, non-entity assets consisted of the following:
                                                               Non-Entity Assets
                                                                    (Dollars in Millions)

                                                                                                         2014                       2013
           Non-Entity Assets
             Intragovernmental:
                Fund Balance with Treasury                                                      $                44        $               40
                  Total Intragovernmental                                                                        44                        40
             With the Public:
                Cash and Other Monetary Assets                                                               1,471                     1,482
                Credit Program Receivables, Net                                                                387                       369
                Accounts Receivable, Net                                                                        63                        61
                   Total With the Public                                                                     1,921                     1,912
           Total Non-Entity Assets                                                                           1,965                     1,952
           Entity Assets                                                                                 1,021,961                   935,106
           Total Assets                                                                         $        1,023,926         $         937,058


The Department’s FY 2014 assets are predominantly entity assets (99.8 percent), leaving the
small portion of assets remaining as non-entity assets. Non-entity intragovernmental assets
primarily consist of deposit fund and clearing account balances. Non-entity assets with the
public primarily consist of guaranty agency reserves (76.6 percent), reported as Cash and
Other Monetary Assets, and related Federal Perkins Loan Program loan receivables
(20.1 percent), reported as Credit Program Receivables, Net. Federal Perkins Loan Program is
a non-entity asset because the assets are held by the Department but are not available to the
Department. The corresponding liabilities for these non-entity assets are reflected in various
accounts, including Intragovernmental Accounts Payable, Guaranty Agency Federal Fund Due
to Treasury, and Other Liabilities. (See Notes 5, 9, and 11)

Note 3. Fund Balance with Treasury
Fund Balance with Treasury by status of funds and fund type, as of September 30, 2014 and
2013, consisted of the following:
                                                  Fund Balance with Treasury
                                                                (Dollars in Millions)

                                                                                                    2014
                                                                                                                        All
                                                     General        Revolving           Special            Trust       Other
                                                     Funds           Funds              Funds              Funds       Funds           Total
   Status of Funds
   Unobligated Balance:
              Available                              $ 12,125           $    69             $        -      $      -   $        -      $12,194
              Unavailable                               1,230            10,040                     11             -            -       11,281
   Obligated Balance, Not Yet Disbursed                56,208            18,964                      4             1            -       75,177
   Other                                                    -                 -                      -             -           44           44
   Fund Balance with Treasury                        $ 69,563           $29,073             $       15       $     1   $       44      $98,696




FY 2014 Agency Financial Report—U.S. Department of Education                                                                                    67
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
                                                                                       2013
                                                                                                                All
                                            General     Revolving          Special             Trust           Other
                                            Funds        Funds             Funds               Funds           Funds         Total
     Status of Funds
     Unobligated Balance:
                Available                   $ 13,700     $      -              $        -          $       -   $        -   $ 13,700
                Unavailable                    1,010       11,315                      15                  -            -     12,340
     Obligated Balance, Not Yet Disbursed     59,619       23,028                       2                  3            -     82,652
     Other                                         -            -                       -                  -           40         40
     Fund Balance with Treasury             $ 74,329     $ 34,343              $       17          $       3    $      40   $108,732

Composition of Funds
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. Special funds
include fees collected on delinquent or defaulted Perkins loans that have reverted back to the
Department from the initial lenders. Trust funds generally consist of remaining undisbursed
donations for the hurricane relief activities.
Status of 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. Total unavailable unobligated balances ($11,281 million)
differs from unapportioned amounts on the SBR ($12,752 million) due to the Cash and Other
Monetary Assets ($1,471 million). Obligated balances not yet disbursed include undelivered
orders and unpaid expended authority. (See Note 5)

Note 4. Accounts Receivable
Accounts Receivable, as of September 30, 2014 and 2013, consisted of the following:
                                                  Accounts Receivable
                                                       (Dollars in Millions)

                                                                                            2014
                                                     Gross
                                                   Receivables                         Allowance                   Net Receivables

           Intragovernmental                  $                  3                 $                   -        $                3
           With the Public                                    324                                  (188)                       136

           Total                              $               327                  $               (188)        $              139


                                                                                            2013
                                                     Gross
                                                   Receivables                         Allowance                   Net Receivables

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

           Total                               $              308              $                   (185)           $          123




68                                                                         FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                                           FINANCIAL SECTION
                                                                                          NOTES TO THE FINANCIAL STATEMENTS

Gross Receivables by type, as of September 30, 2014 and 2013, are presented below.

                                                               Gross Receivables
                                                                  (Dollars in Millions)


                                                                                                  2014                2013
           Category
              Institutional                                                               $              209      $          194
              Individual                                                                                 72                   72
              State and Local                                                                            43                   40
              Intragovernmental                                                                           3                    2
           Total                                                                          $              327      $          308


Accounts receivable consist of institutional debt resulting from external audit or program review;
program scholarship grant repayments; employee debt; and intragovernmental debts due from
other federal agencies through interagency agreements.

Note 5. Cash and Other Monetary Assets
Cash and Other Monetary Assets consist of reserves held in the FFEL guaranty agency
Federal Fund. 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 Fund Due to Treasury. The table below presents Cash and Other Monetary
Assets for the years ended September 30, 2014 and 2013.
                                                 Cash and Other Monetary Assets
                                                                  (Dollars in Millions)

                                                                                                     2014               2013
           Beginning Balance, Cash and Other Monetary Assets                                  $           1,482   $          1,307
              Increase/(Decrease) in Guaranty Agency Federal Fund, net                                     (11)                175

           Ending Balance, Cash and Other Monetary Assets                                     $           1,471   $          1,482


The $11 million net decrease in the Federal Fund in FY 2014 represents the change in the
estimated value of net assets held in the FFEL guaranty agency Federal Fund. This decrease
reflects the impact of guaranty agencies’ operations.

Note 6. Credit Programs for Higher Education: Credit Program
Receivables, Net and Liabilities for Loan Guarantees
The Department currently operates two major student loan programs, Direct Loan and FFEL.
The Direct Loan Program offers four types of loans: Stafford, Unsubsidized Stafford, PLUS,
and Consolidation. Evidence of financial need is required for an undergraduate 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.
The Department holds $924 billion in outstanding student loan net receivables. This
outstanding balance is comprised primarily of Direct Loan, FFEL, and loans purchased using
authority provided in Ensuring Continued Access to Student Loans Act of 2008 (ECASLA), but
there are several other loan programs that the Department administers—including the Federal
Perkins Loan Program, the TEACH Grant Program, HEAL Program, and the Facilities Loan
Programs.



FY 2014 Agency Financial Report—U.S. Department of Education                                                                         69
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

Credit Program Receivables, as of September 30, 2014 and 2013, consisted of the following:

                                    Credit Program Receivables, Net
                                                  (Dollars in Millions)


                                                                                        2014                      2013
     Direct Loan Program Loan Receivables, Net                                     $     778,516             $     679,107
     FFEL Program Loan Receivables:
      FFEL Guaranteed Loan Program, Net (Pre-1992)                                          1,904                     2,231
      FFEL Program (Post-1991):
        FFEL Guaranteed Loan Program, Net                                                  37,969                    35,144
        Temporary Loan Purchase Authority:
         Loan Purchase Commitment, Net                                                     36,556                    38,946
         Loan Participation Purchase, Net                                                  64,513                    67,546
         ABCP Conduit, Net                                                                  1,922                     1,864
     Federal Perkins and Other Loan Program Loan Receivables, Net                             387                       369
     TEACH Program Loan Receivables, Net                                                      536                       453
     HEAL Program Loan Receivables, Net                                                       115
     Facilities Loan Programs Loan Receivables, Net                                         1,127                     1,024

     Total                                                                        $      923,545             $     826,684


Due to Congressional legislation, HHS will report all prior year HEAL Program information on
their financial statements. Thus, the Department will not report FY 2013 HEAL Program
information on the comparable financial statements in FY 2014.
The federal student loan programs provide students and their families with the funds to help
meet postsecondary education costs. Funding for these programs is provided through
permanent indefinite budget authority. What follows is a comprehensive description of the
student loan programs at the Department, including summary financial data and subsidy rates.
William D. Ford Federal Direct Loan Program. The federal government makes loans directly
to students and parents through participating institutions of higher education under the Direct
Loan Program. Direct Loans are originated and serviced through contracts with private
vendors. As of September 30, 2014 and 2013, total principal balances outstanding of Direct
Loans were approximately $694 billion and $585 billion, respectively.
The Department disbursed approximately $134 billion in Direct Loans to eligible borrowers in
FY 2014 and approximately $130 billion in FY 2013. Of the $134 billion disbursed in Direct
Loans, new loans were $99 billion and consolidation loans were $35 billion. Loans are typically
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 8.5 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 2014 cohort, an
estimated $12.6 billion will never be disbursed. Eligible schools may obtain advances from the
Department to fund Direct Loans awards or request subsequent reimbursement from the
Department.



70                                                                        FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                                                FINANCIAL SECTION
                                                                                               NOTES TO THE FINANCIAL STATEMENTS

Direct Loan Program loan receivables are defaulted and non-defaulted loans owned and held
by the Department. 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)

                                                                                                  2014              2013
      Principal Receivable                                                                 $       694,006     $     584,528
      Interest Receivable                                                                           37,152            29,332
        Total                                                                                      731,158           613,860
      Allowance for Subsidy                                                                         47,358            65,247
      Direct Loan Program Loan Receivables, Net                                            $       778,516     $     679,107


Of the $731.2 billion in receivables, as of September 30, 2014, $33.9 billion (4.6 percent) in
loan principal was in default and had been transferred to the Department’s defaulted loan
servicer, compared to $28.9 billion (4.7 percent) as of September 30, 2013. As of
September 30, 2014 and 2013, an additional $0.5 billion and $1.1 billion, respectively 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.
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 and loan servicing activities under the 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)
                                                                                           2014                    2013
      Beginning Balance, Allowance for Subsidy                                         $      65,247          $       32,076
      Activity
      Fee Collections                                                                            (1,623)             (1,557)
      Loan Cancellations                                                                           2,068               1,890
      Subsidy Allowance Amortization                                                            (11,319)             (7,719)
      Other                                                                                        1,111               1,000
      Total Activity                                                                             (9,763)             (6,386)
      Components of Negative Subsidy Transfers
      Interest Rate Differential                                                                  33,161             37,063
      Defaults, Net of Recoveries                                                                (1,409)             (1,887)
      Fees                                                                                         1,756               1,801
      Other                                                                                     (11,418)             (9,967)
      Current Year Negative Subsidy Transfers                                                    22,090               27,010
      Components of Subsidy Re-estimates
      Interest Rate Re-estimates                                                                 (8,344)              11,754
      Technical and Default Re-estimates                                                        (21,872)                 793
      (Upward)/Downward Subsidy Re-estimates                                                    (30,216)              12,547

      Ending Balance, Allowance for Subsidy                                            $         47,358       $       65,247




FY 2014 Agency Financial Report—U.S. Department of Education                                                                   71
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

Loan cancellations include write-offs of loans because the primary borrower died, became
disabled, or declared bankruptcy. The Other components of current year negative subsidy
transfers consist of contract collection costs, program review collections, fees, and other
accruals. The interest rate re-estimate relates to subsidy associated with establishing a fixed
rate for the Department’s borrowing from Treasury.
The following schedule summarizes the Direct Loan Financing Account interest expense and
interest revenue for the years ended September 30, 2014 and 2013:

                       Direct Loan Program Interest Expense and Revenue
                                                (Dollars in Millions)

                                                                               2014                            2013
     Interest Expense on Treasury Borrowing                             $          25,152             $            22,661
     Total Interest Expense                                             $          25,152             $            22,661


     Interest Revenue from the Public                                   $            32,801           $            26,972
     Amortization of Subsidy                                                       (11,319)                        (7,720)
     Interest Revenue on Uninvested Funds                                             3,670                          3,409
     Total Interest Revenue                                             $            25,152           $            22,661


The following schedule summarizes the Direct Loan Financing Account subsidy expense for
the years ended September 30, 2014 and 2013:

                                Direct Loan Program Subsidy Expense
                                                (Dollars in Millions)

                                                                                   2014                        2013
     Components of Negative Subsidy Transfers
     Interest Rate Differential                                                $      33,161               $      37,063
     Defaults, Net of Recoveries                                                     (1,409)                      (1,887)
     Fees                                                                              1,756                        1,801
     Other                                                                          (11,418)                      (9,967)
     Negative Subsidy Transfers                                                       22,090                      27,010

     (Upward)/Downward Subsidy Re-estimates                                         (30,216)                       12,547

     Direct Loan Subsidy Expense                                              $       (8,126)              $       39,557


The change in Direct Loan Subsidy Expense of $47.7 billion from FY 2013 to FY 2014 is
primarily due to the change in subsidy re-estimates. Direct Loan re-estimated subsidy cost was
adjusted upward by $30.2 billion in FY 2014. Updated discount rates for the 2013 and 2012
cohorts decreased cost by $4.4 billion. Changes in the availability of repayment plans
increased cost by $18.6 billion. Costs increased $2.9 billion due to increases in default rates.
Changes in prepayment rates reflect slower than expected prepayment activity, leading to
increased interest earnings resulting in $3.2 billion in downward subsidy cost. Other
assumption updates produced offsetting costs, with the remainder attributable to interest on the
re-estimate. In June 2014, President Obama announced a new initiative to expand the Pay As
You Earn repayment plan to all borrowers. The modified cost for subsidy of this plan for cohort
years 1994-2013 is $8.3 billion. This planned initiative will be negotiated with interested parties
in 2015. 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
$3.5 billion. Re-estimated costs only include those cohorts that are 90 percent disbursed;
cohort years 1994–2013.


72                                                                      FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                                                FINANCIAL SECTION
                                                                                               NOTES TO THE FINANCIAL STATEMENTS

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 decreased cost by $11.8 billion.
Deferment and forbearance rate changes decreased cost by $1.5 billion. Costs increased
$1.5 billion due to increases in default and disability rates. Changes in prepayment rates reflect
slower than expected prepayment activity, leading to increased interest earnings resulting in
$1.1 billion in downward subsidy cost. Other assumption updates produced offsetting costs,
with the remainder attributable to interest on the re-estimate. The subsidy rate is sensitive to
interest rate fluctuations; for example, a 1 percent increase in projected borrower base rates
would reduce projected Direct Loan subsidy cost by $1.8 billion. Re-estimated costs only
include those cohorts that were 90 percent disbursed; cohort years 1994–2012.
The subsidy rates applicable to the 2014 loan cohort year follow:
                                       Direct Loan Subsidy Rates—Cohort 2014
                                                                Interest
                                                               Differential        Defaults       Fees      Other       Total

     Stafford                                                   (4.86)%              0.15%       (1.07)%     6.37%      0.59%
     Unsubsidized Stafford                                     (25.51)%              0.27%       (1.07)%     7.77%    (18.54)%
     PLUS                                                      (34.89)%              0.51%       (4.29)%     6.99%    (31.68)%
     Consolidation                                              (6.59)%              1.58%       0.00%      11.14%      6.13%
     Total                                                     (18.08)%              0.59%       (1.25)%     8.20%    (10.54)%


The subsidy rate represents the subsidy expense of the program in relation to the obligations or
commitments made during the fiscal year and are weighted on gross volume. The subsidy
expense for new direct loans reported in the current year relates 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 2014 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 Department does not re-estimate student loan cohorts until they are at least 90 percent
disbursed. As a result, the financial statement re-estimate does not include a re-estimate of the
current year cohort. The first re-estimate of this cohort will take place upon execution of the
2016 President's Budget.
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.

The following schedule summarizes the Direct Loan Program loan disbursements by loan type
for the years ended September 30, 2014 and 2013:
                                Direct Loan Program Expenditures by Loan Type
                                                                 (Dollars in Millions)

                                                                                              2014                   2013
      Stafford                                                                           $       (25,877)     $         (26,530)
      Unsubsidized Stafford                                                                      (54,740)               (56,122)
      PLUS                                                                                       (18,910)               (19,388)
      Consolidation                                                                              (34,525)               (27,472)
      Total Expenditures                                                                 $     (134,052)      $       (129,512)




FY 2014 Agency Financial Report—U.S. Department of Education                                                                       73
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

The allocation of disbursements for the first three loan types is estimated based on historical
trend information.
Student and parent borrowers may prepay existing loans without penalty through a new
consolidation loan. Under the FCRA and requirements provided by OMB regulations, the
retirement of Direct Loans being consolidated is considered a collection 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 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 consolidations increased from $28 billion during FY 2013 to $35 billion during
FY 2014. Under the FCRA, the subsidy costs of new consolidation loans are not reflected until
the future fiscal year in which they are disbursed. The effect of the early payoff of the existing
loans—those being consolidated—is recognized in the future projected cash flows of the past
cohort year in which the loans were originated.
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 2014 or FY 2013. Federal
guarantees on FFEL Program loans and commitments remain in effect for loans made before
July 1, 2010, that were sold to the Department through an ECASLA program, consolidated into
a direct loan, or otherwise satisfied, discharged, or cancelled. As of September 30, 2014 and
2013, total principal balances outstanding of guaranteed loans held by lenders were
approximately $242 billion and $264 billion, respectively. As of September 30, 2014 and 2013,
the estimated maximum government exposure on outstanding guaranteed loans held by
lenders was approximately $236 billion and $258 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.




74                                                        FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                                            FINANCIAL SECTION
                                                                                           NOTES TO THE FINANCIAL STATEMENTS



                                         FFEL Program Loan Receivables, Net
                                                               (Dollars in Millions)
                                                                                             2014               2013

      FFEL Program (Pre-1992)
        Principal Receivable                                                           $         4,707     $       5,040
        Interest Receivable                                                                      5,810             5,563
          Total                                                                                10,517            10,603
        Allowance for Subsidy                                                                  (8,586)           (8,356)
        Liabilities for Loan Guarantees                                                            (27)              (16)
      FFEL Guaranteed Loan Program, Net (Pre-1992)                                               1,904             2,231

      FFEL Program (Post-1991)
      FFEL Guaranteed Loan Program:
      Principal Receivable                                                                     34,251            32,649
      Interest Receivable                                                                        5,273             4,849
        Total                                                                                  39,524            37,498
         Allowance for Subsidy                                                                 (5,773)           (6,614)
         Liabilities for Loan Guarantees                                                         4,218             4,260
      FFEL Guaranteed Loan Program, Net (Post-1991)                                            37,969            35,144

      Temporary Loan Purchase Authority:
      Loan Purchase Commitment:
      Principal Receivable                                                                     29,401            31,899
      Interest Receivable                                                                       1,927             1,859
        Total                                                                                  31,328            33,758
           Allowance for Subsidy                                                                5,228             5,188
      Loan Purchase Commitment, Net                                                            36,556            38,946
      Loan Participation Purchase:
      Principal Receivable                                                                     52,782            56,041
      Interest Receivable                                                                       3,358             3,297
        Total                                                                                  56,140            59,338
           Allowance for Subsidy                                                                8,373             8,208
      Loan Participation Purchase, Net                                                         64,513            67,546
      ABCP Conduit:
      Principal Receivable                                                                      2,036             2,208
      Interest Receivable                                                                         218               193
        Total                                                                                   2,254             2,401
           Allowance for Subsidy                                                                (332)             (537)
      ABCP Conduit, Net                                                                         1,922             1,864

      FFEL Program Loan Receivables, Net                                               $      142,864      $    145,731


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 Asset-Backed Commercial Paper (ABCP) Conduit. This
authority expired after September 30, 2010; as a result, loan purchase commitments and
purchases of loan participation interests concluded. However, under the terms of the Put
Agreement with the conduit, ABCP Conduit activity ceased operations in January 2014.
The asset-backed commercial paper vehicle, the Conduit, closed in early FY 2014, resulting in
a $71 billion recovery of prior year obligations and the cancellation of unused borrowing
authority.

FY 2014 Agency Financial Report—U.S. Department of Education                                                                75
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

The FFEL Guaranteed Student Loan Financing Account has a negative estimated Liability for
Loan Guarantees of $4.2 billion and $4.3 billion as of September 30, 2014 and 2013,
respectively. This indicates that expected collections on anticipated future defaulted loans will
be in excess of default disbursements, calculated on a net present value basis. Under GAAP,
the negative estimated liability has been classified as a component of Credit Program
Receivables on the Consolidated Balance Sheet. 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)

                                                                                   2014                          2013
     Beginning Balance, FFEL Financing Account Liability for
     Loan Guarantees                                                        $           4,260            $         (1,013)
     Activity
     Interest Supplement Payments                                                       1,094                       1,336
     Claim Payments                                                                     8,914                       9,125
     Fee Collections                                                                  (2,156)                      (2,239)
     Interest on Liability Balance                                                      1,843                       1,783
     Other                                                                          (13,785)                      (12,564)
     Total Activity                                                                   (4,090)                      (2,559)
     Components of Loan Modifications
     Loan Modification Costs                                                            4,020                             -
     Modification Adjustment Transfers                                                  (581)                             -
     Loan Modifications                                                                 3,439                             -


     (Upward)/Downward Subsidy Re-estimates                                               609                       7,832

     Ending Balance, FFEL Financing Account Liability for Loan
     Guarantees                                                                         4,218                       4,260
     FFEL Liquidating Account Liability for Loan Guarantees                               (27)                        (16)
     Liabilities for Loan Guarantees                                        $           4,191                $      4,244


Other activity includes negative special allowance collections, collections on defaulted FFEL
loans, expenditures, and loan cancellations due to death, disability, or bankruptcy.




76                                                                      FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                                                FINANCIAL SECTION
                                                                                               NOTES TO THE FINANCIAL STATEMENTS

The following schedules provide reconciliations between the beginning and ending balances of
the allowance for subsidy for the Loan Purchase Commitment component and the Loan
Participation Purchase component of the FFEL Program. Loans in these programs are loans
acquired by the Department. Acquired loans are reported at their net present value of future
cash flows.


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

                                                                                               2014                       2013
      Beginning Balance, Allowance for Subsidy                                             $         5,188            $        5,258
      Activity
      Subsidy Allowance Amortization                                                                  (749)                      (771)
      Loan Cancellations                                                                               116                        106
      Contract Collection Cost and Other                                                                72                         51
      Total Activity                                                                                  (561)                      (614)


      (Upward)/Downward Subsidy Re-estimates                                                           601                        544

      Ending Balance, Allowance for Subsidy                                                $         5,228            $        5,188



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

                                                                                               2014                       2013
      Beginning Balance, Allowance for Subsidy                                             $         8,208            $        8,910
      Activity
      Subsidy Allowance Amortization                                                                (1,304)                 (1,319)
      Loan Cancellation                                                                                224                        197
      Contract Collection Cost and Other                                                                93                         43
      Total Activity                                                                                  (987)                 (1,079)


      (Upward)/Downward Subsidy Re-estimates                                                         1,152                        377

      Ending Balance, Allowance for Subsidy                                                $         8,373            $        8,208


The following schedule provides FFEL Program subsidy expense for the years ended
September 30, 2014 and 2013, respectively:
                                                  FFEL Program Subsidy Expense
                                                                   (Dollars in Millions)

                                                                                                        2014                   2013
           FFEL Guaranteed Loan Program Subsidy Re-estimates                                    $               609        $        7,832
           Loan Purchase Commitment Subsidy Re-estimates                                                        601                   544
           Loan Participation Purchase Subsidy Re-estimates                                                   1,152                   377
           ABCP Conduit Subsidy Re-estimates                                                                    203                     -
           FFEL Program (Upward)/Downward Subsidy Re-estimates                                                2,565                 8,753

           FFEL Guaranteed Loan Program Modification Costs                                                    4,020                      -

           FFEL Program Subsidy Expense                                                          $            6,585        $        8,753




FY 2014 Agency Financial Report—U.S. Department of Education                                                                                 77
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

FFEL Guaranteed re-estimated subsidy cost was adjusted downward by $0.6 billion in
FY 2014. Costs decreased $411 million due to updated economic assumptions, including
probabilistic deterministic rates, which reflected historically low commercial paper rates,
resulting in substantially higher negative special allowance payments than were previously
projected. Costs decreased $111 million due to maturity and debt distribution assumption
updates. 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 $18 billion.
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 lenders would increase
projected FFEL costs by $12.3 billion.
Modification of Subsidy Cost. 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 recorded for modification costs and modification adjustment
transfers. The Department modified loans in FY 2014, but not in FY 2013.
FY 2014 Modification. The Bipartisan Budget Act of 2013 eliminated guaranty agencies'
retention share of original defaulted student loan amounts, and reduced the maximum fee they
can charge a borrower on the borrower's outstanding balance from 18.5 to 16 percent. The Act
required these agencies to send rehabilitated loans to the Department if they cannot find a
private lender buyer. These technical changes resulted in a $4 billion downward subsidy cost
modification and a $581 million modification adjustment transfer loss for the FFEL Financing
Account.
Other Credit Programs for Higher Education
Federal Perkins Loan Program. The Federal Perkins Loan Program 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.
As of September 30, 2014 and 2013, loan and interest receivables, net of allowance for losses,
were $387 million and $358 million, respectively. These receivables are valued at net realizable
value with estimated allowance for losses of $161 million and $154 million as of September 30,
2014 and 2013, respectively.
TEACH Grant Program. The Department awards annual grants of up to $4,000 to eligible
undergraduate and graduate students who agree to serve as full-time mathematics, science,
foreign language, bilingual education, special education, or reading teachers at high-need
schools for four years within eight years of graduation. The maximum lifetime grant for students
is $16,000 for undergraduate programs and $8,000 for graduate programs. For students failing
to fulfill the service requirement, the grants are converted to Direct Unsubsidized Stafford


78                                                       FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                                          FINANCIAL SECTION
                                                                                         NOTES TO THE FINANCIAL STATEMENTS

Loans. Since grants can be converted to direct loans, for budget and accounting purposes, the
program is operated as a loan program under the FCRA.
As of September 30, 2014 and 2013, loan receivables were $536 million and $453 million,
respectively. The receivable balance is net of allowance for subsidy of $120 million and
$106 million as of September 30, 2014 and 2013, respectively.
The subsidy rates applicable to the 2014 loan cohort year follow:
                                          TEACH Subsidy Rates—Cohort 2014
                                                                Interest
                                                               Differential   Defaults     Fees     Other      Total

     Total Subsidy Rates                                        6.96%          0.24%       0.00%     6.55%    13.75%


HEAL Program. The Department assumed responsibility for the HEAL program and the
authority to administer, service, collect, and enforce the program. The HEAL Program is
structured as required by the FCRA. A Liquidating Account is used to record all cash flows to
and from the government resulting from guaranteed HEAL loans committed prior to 1992.
Credit program receivables, net of allowance for subsidy and liabilities for loan guarantees,
were $115 million for FY 2014. All loan activity for 1992 and beyond is recorded in
corresponding Financing Accounts.
Facilities Loan Programs. The Department also administers the HBCU Capital Financing
Program. Since 1992, this program has given HBCUs access to financing for the repair,
renovation, and, in exceptional circumstances, the construction or acquisition of facilities,
equipment, and infrastructure through federally insured bonds. The Department has authorized
a designated bonding authority to make loans to eligible institutions, charge interest, and collect
principal and interest payments. In compliance with HEA, as amended, the bonding authority
maintains an escrow account to pay the principal and interest on bonds for loans in default.
The total amount of support for HBCU programs, along with any accrued interest and unpaid
servicing fees, will be capitalized to principal and be reamortized through the original maturity
date of June 1, 2037. The Department has approximately $1.3 billion in outstanding borrowing
from the FFB to support loans made to HBCU institutions and approximately $213 million
obligated to support near term lending as of September 30, 2014.
The Department administers the College Housing and Academic Facilities Loan Program
(CHAFL), the College Housing Loan Program, and the Higher Education Facilities Loan
Program. From 1952 to 1993, these programs provided low-interest financing to institutions of
higher education for the construction, reconstruction, and renovation of housing, academic, and
other educational facilities.




FY 2014 Agency Financial Report—U.S. Department of Education                                                             79
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

The following schedule summarizes the principal and related interest receivables, net of the
allowance for subsidy:
                          Facilities Loan Programs Loan Receivables, Net
                                                     (Dollars in Millions)

                                                                                               2014                           2013
     Principal Receivable                                                              $          1,324           $              1,211
     Interest Receivable                                                                             12                             10
       Total                                                                                      1,336                          1,221
     Allowance for Subsidy/Loss                                                                   (209)                          (197)
     Facilities Loan Programs Loan Receivables, Net                                    $          1,127           $              1,024



Administrative Expenses
Administrative expenses, for the periods ended September 30, 2014 and 2013, consisted of the
following:
                                           Administrative Expenses
                                                     (Dollars in Millions)

                                                      2014                                                     2013
                                       Direct Loan                  FFEL                   Direct Loan                      FFEL
                                        Program                   Program                   Program                       Program
     Operating Expense                 $       604               $           390           $         639              $          413
     Other Expense                              22                           14                           25                       16

     Total                             $       626               $           404           $         664              $          429


Note 7. Property and Equipment, Net and Leases
Property and Equipment, as of September 30, 2014 and 2013, consisted of the following:
                                           Property and Equipment, Net
                                                         (Dollars in Millions)

                                                                                                  2014
                                                                     Asset                     Accumulated                     Net Asset
                                                                     Cost                      Depreciation                     Value

        Information Technology, Internal Use Software,
        and Telecommunications Equipment                     $               181           $          (174)           $                  7
        Furniture and Fixtures                                                   3                         (3)                             -

        Property and Equipment, Net                          $               184           $          (177)               $                7



                                                                                                  2013
                                                                     Asset                     Accumulated                     Net Asset
                                                                     Cost                      Depreciation                     Value

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

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


The Depreciation expense for the years ended September 30, 2014 and 2013 was $1 million
and $6 million, respectively.

80                                                                             FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                                              FINANCIAL SECTION
                                                                                             NOTES TO THE FINANCIAL STATEMENTS

The major drivers of fixed assets at the Department are improvements to information
technology, including financial management and program management systems. Specifically,
recent enhancements have been made to the Department’s automated grant management and
financial reporting systems for the Department and FSA. The Department has acquired more
robust information technology to augment its significant capabilities to manage student loan
and grant operations. In addition, the Department has very limited or no acquisition cost
associated with furniture and fixtures. The Department owns and maintains a few school
buildings on various military bases.
All Department and contractor staff are housed in leased buildings. The Department does not
own real property for the use of its staff. The Department leases office space from the General
Services Administration (GSA). The lease contracts with GSA for privately and publicly owned
buildings are operating leases. Future lease payments are not accrued as liabilities, and are
expensed as incurred. The Department leases 22 privately owned and 8 publicly owned
buildings in 19 cities. Building lease expense, as of September 30, 2014 and 2013, was $70
million and $80 million, respectively. The majority of leases is for information technology,
telecommunications equipment, and leased buildings.
Estimated future minimum lease payments for the privately and publicly owned buildings are
presented below.
                                                 Future Minimum Lease Payments
                                                                 (Dollars in Millions)

                                 2014                                                                   2013
           FY                                         Amount                             FY                           Amount
           2015                                           78                             2014                             80
           2016                                           83                             2015                             90
           2017                                           88                             2016                             93
           2018                                           91                             2017                             96
           2019                                           97                             2018                            100
           After 2019                                    100                             After 2018                      103
           Total                                      $    537                           Total                        $   562


Note 8. Other Assets
Other Intragovernmental Assets primarily consist of advance payments to the U.S. Department
of Interior's (DOI) Bureau of Indian Education under terms of an interagency agreement. Under
this agreement, funds are transferred from DOI to fund initiatives that include, but are not
limited to: (1) Improving Basic Programs Operated by Local Education Agencies;
(2) Comprehensive School Reform; (3) Teacher Quality Improvement Formula Grants;
(4) Enhancing Education through Technology; and (5) 21st Century Community Learning
Centers. Other Intragovernmental Assets were $55 million and $22 million as of September 30,
2014 and 2013, respectively.
Other Assets with the public consist of payments made to grant recipients in advance of their
expenditures and in-process invoices for interest benefits and special allowances for the FFEL
Program. Other Assets with the public were $13 million as of September 30, 2014 and 2013.




FY 2014 Agency Financial Report—U.S. Department of Education                                                                    81
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

Note 9. Accounts Payable
Accounts Payable, as of September 30, 2014 and 2013, consisted of the following:
                                               Accounts Payable
                                                     (Dollars in Millions)

                                                                                        2014                        2013
       Accrual for Unreimbursed Loan Disbursements                            $                3,027          $            2,923
       In Process Disbursements:
          Direct Loans                                                                           312                         573
          Grants                                                                                 264                         366
          FFEL Claim Payments                                                                    311                           52
       Contractual Services                                                                      212                         228
       Other                                                                                   (126)                         (15)
       Accounts Payable to the public                                                          4,000                       4,127

       Intragovernmental Accounts Payable                                                         1                              2

       Total Accounts Payable                                                       $          4,001          $            4,129

Accounts Payable to the public primarily consists of in-process grant and loan disbursements,
including an accrued liability for schools that have disbursed loans prior to requesting funds.
The Department pays vendor invoices according to the Prompt Payment Act rules that are built
into the financial system as a control mechanism, generally within 25–30 days of receipt of
goods and proper invoicing. The Department also monitors and leverages vendor discount
opportunities by processing payments to coincide with discount terms when possible.
FY 2014 Accounts Payable Other abnormal balance of $(126) million is primarily due to a
temporary adjustment related to FFEL Guaranteed Loan Program collections of fees, principal,
and interest on defaulted loans.

Note 10. Debt
Debt, as of September 30, 2014 and 2013, consisted of the following:
                                                             Debt
                                                      (Dollars in Millions)

                                                                                    2014
                                        Beginning                                                                      Ending
                                         Balance                 Borrowing                 Repayments                  Balance
      Treasury Debt
      Direct Loan Program                   $ 698,361              $    171,227                $ (50,581)                 $ 819,007
      FFEL Program
         Guaranteed Loan Program              43,254                          -                          -                   43,254
         Loan Purchase Commitment             38,598                        976                    (3,303)                   36,271
         Loan Participation Purchase          68,017                        790                    (4,505)                   64,302
         ABCP Conduit                          2,543                        203                      (773)                    1,973
      TEACH Program                              485                         99                       (29)                      555
      Facilities Loan Programs                    37                          -                          -                       37
      Total Treasury Debt                    851,295                    173,295                   (59,191)                  965,399
      Debt to the FFB
      HBCU                                     1,137                          156                      (21)                    1,272
      Total Debt to the FFB                    1,137                          156                      (21)                    1,272
      Total                                 $ 852,432              $    173,451                $ (59,212)                  $966,671




82                                                                       FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                                     FINANCIAL SECTION
                                                                                    NOTES TO THE FINANCIAL STATEMENTS

                                                                                      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
          Facilities Loan Programs                                 45             -                    (8)          37
          Total Treasury Debt                              714,369          179,931               (43,005)     851,295
          Debt to the FFB
          HBCU                                                 934              225                   (22)        1,137
          Total Debt to the FFB                                934              225                   (22)        1,137
          Total                                          $ 715,303      $   180,156           $   (43,027)    $ 852,432


The Department borrows from Treasury to fund the disbursement of new loans and the
payment of credit program outlays and related costs. During FY 2014, debt increased
13 percent from $852 billion in the prior year to $967 billion. The Department makes periodic
principal payments after considering the cash position and liability for future outflows in each
cohort of loans, as mandated by the FCRA.
Over 84 percent of the Department’s debt, as of September 30, 2014, is attributable to the
Direct Loan Program. The majority of the net borrowing activity (borrowing less repayments) for
the year was designated for funding new Direct Loan disbursements. Net borrowing in the
Direct Loan Program for FY 2014 totaled $121 billion. The new financing was used to disburse
new loans and make negative subsidy transfers. The Department also borrowed funding to
execute the downward subsidy re-estimate on the entire portfolio and to pay its interest to
Treasury at year-end. Principal payments were made during the year. FFEL and some
Facilities Loan Programs are no longer offering new financing to public borrowers or entering
into guaranty agreements with lending authorities.
The Department also borrows from Treasury for activity in the TEACH and HBCU Programs.
During FY 2014, TEACH net borrowing of $70 million was used for the advance of new grants
and repayments of principal made to Treasury. In FY 2014, debt in HBCU increased by
$135 million, or 12 percent. This total represents the aggregate of new bonds administered and
repayments made on previously issued bonds.




FY 2014 Agency Financial Report—U.S. Department of Education                                                           83
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

Note 11. Other Liabilities
Other Liabilities, as of September 30, 2014 and 2013, consisted of the following:
                                                    Other Liabilities
                                                          (Dollars in Millions)

                                                                         2014                                           2013
                                                               Intragovern-   With the                       Intragovern-    With the
                                                                  mental       Public                           mental       Public
     Liabilities Covered by Budgetary Resources
       Current
          Advances From Others                                  $            26             $        -        $          29      $            -
          Employer Contributions and Payroll Taxes                            3                      -                    6                   -
          Liability for Deposit Funds and Clearing
           Accounts                                                        (22)                    74                     7                 37
          Accrued Payroll and Benefits                                        -                    13                     -                 28
          Deferred Revenue                                                    -                    50                     -                 31
          Liabilities in Miscellaneous Receipt Accounts                  3,783                      -                 6,074                  -
     Total Other Liabilities Covered by
     Budgetary Resources                                                 3,790                    137                 6,116                 96


     Liabilities Not Covered by Budgetary Resources
       Current
          Accrued Unfunded Annual Leave                                           -                38                      -                36
       Non-Current
          Accrued Unfunded FECA Liability                                    3                       -                    4                  -
          Custodial Liability                                                2                       -                    2                  -
          Liabilities in Miscellaneous Receipt Accounts                    376                       -                  358                  -
          Capital Transfers                                              2,242                       -                2,375                  -
          Accrued FECA Actuarial Liability                                   -                       2                    -                 15
     Total Other Liabilities Not Covered by
     Budgetary Resources                                                 2,623                     40                 2,739                 51

     Other Liabilities                                              $    6,413            $       177          $      8,855          $     147


Other liabilities include current and non-current liabilities. The current liabilities covered by
budgetary resources primarily consist of $3.7 billion for downward subsidy re-estimates, 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, excess unanticipated collections on defaulted loans in liquidating accounts in the
amount of $2.2 billion, and the student loan receivables of the Federal Perkins Loan Program in
the amount of $376 million.
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 $2.6 billion and $2.7 billion as
of September 30, 2014 and 2013, respectively.
As of September 30, 2014 and 2013, liabilities totaled $981.2 billion and $869.2 billion,
respectively. Of this amount, liabilities covered by budgetary resources totaled $978.6 billion
and $866.4 billion as of September 30, 2014 and 2013, respectively.




84                                                                                    FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                                                FINANCIAL SECTION
                                                                                               NOTES TO THE FINANCIAL STATEMENTS

Note 12. Accrued Grant Liability
The Accrued Grant Liability by major program office, as of September 30, 2014 and 2013,
consisted of the following:
                                                         Accrued Grant Liability
                                                               (Dollars in Millions)

                                                                                                 2014                2013
           FSA                                                                         $                1,719    $           1,727
           OESE                                                                                          386                  145
           OSERS                                                                                         182                  120
           Other                                                                                         200                  178

           Accrued Grant Liability                                                     $                2,487    $           2,170

The majority of Accrued Grant Liability is composed of Pell Grants. The remaining Accrued
Grant Liability also includes Discretionary, Formula, and Campus-Based Student Aid Grants.

Note 13. Net Position
Unexpended appropriations, as of September 30, 2014 and 2013, consisted of the following:
                                                     Unexpended Appropriations
                                                               (Dollars in Millions)

                                                                                                  2014                2013
           Unobligated Balances:
              Available                                                                    $            12,078   $          13,700
              Not Available                                                                              1,169                909
           Undelivered Orders                                                                           53,200              56,762

           Unexpended Appropriations                                                       $            66,447   $          71,371


Cumulative Results of Operations. The Cumulative Results of Operations of $(23,741)
million and $(3,528) million as of September 30, 2014 and 2013, respectively, consists mostly
of unfunded upward subsidy re-estimates for Direct and FFEL Loan Programs, other unfunded
expenses, and net investments of capitalized assets.
Other Financing Sources. Negative Subsidy Transfers, Downward Subsidy Re-estimates,
and Other in the Other Financing Sources section of the Statement of Changes in Net Position
was $(36,767) million and $(51,054) million as of September 30, 2014 and 2013, respectively.
The amount was primarily comprised of Direct Loan and FFEL Program activity.
Appropriations Received. Appropriations Received was $95,293 million and $90,993 million
as of September 30, 2014 and 2013, respectively, and comprised primarily of Pell Grant, Direct
Loan, Special Education, and Education for the Disadvantaged Programs.




FY 2014 Agency Financial Report—U.S. Department of Education                                                                         85
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

Note 14. Intragovernmental Cost and Exchange Revenue by
Program
As required by the GPRA Modernization Act of 2010, each of the Department’s major program
offices have been aligned with the goals presented in the Department’s Strategic Plan 2014–
2018. Strategic Plan Goals 1–5 guide the Department’s program offices to carry out the vision
and programmatic mission, and the net cost programs can be specifically associated with these
five strategic goals. The Department also has a cross-cutting Strategic Plan Goal 6, U.S.
Department of Education Capacity, focusing primarily upon improving the organizational
capacities of the Department to implement the Strategic Plan Goals 1–5. The costs associated
with Strategic Plan Goal 6 are allocated to Goals 1–5 based on the number of full-time
employee equivalents of each program. Some principal offices support more than one
Departmental Strategic Goal, but have been assigned to a single net cost program for the
purposes of this table based on their primary area of support. The change of $50 billion in
Increase College Access, Quality, and Completion Gross Cost from FY 2013 to FY 2014 is
primarily due to an upward subsidy re-estimate for the Direct Loan Program of $30 billion.

           Net Cost Program           Program Office                         Strategic Goal
                                                       Goal 1: Postsecondary Education, Career and
                                                       Technical Education, and Adult Education.
                                          FSA
     Increase College Access,                          Increase college access, affordability, quality, and
                                          OPE
     Quality, and Completion                           completion by improving postsecondary education
                                         OCTAE
                                                       and lifelong learning opportunities for youths and
                                                       adults.

                                                       Goal 2: Elementary and Secondary Education.
                                                       Improve the elementary and secondary education
                                                       system’s ability to consistently deliver excellent
                                                       instruction aligned with rigorous academic standards
                                                       while providing effective support services to close
     Improve Preparation for                           achievement and opportunity gaps, and ensure all
     College and Career from                           students graduate high school college- and career-
                                          OESE
     Birth Through 12th Grade,                         ready.
                                           HR
     Especially for Children with
     High Needs                                        Goal 3: Early Learning. Improve the health, social-
                                                       emotional, and cognitive outcomes for all children
                                                       from birth through 3rd grade, so that all children,
                                                       particularly those with high needs, are on track for
                                                       graduating from high school college- and career-
                                                       ready.

                                          OELA         Goal 4: Equity. Increase educational opportunities
     Ensure Effective Educational
                                          OCR          for underserved students and reduce discrimination
     Opportunities for All Students
                                         OSERS         so that all students are well-positioned to succeed.

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




86                                                               FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                                               FINANCIAL SECTION
                                                                                              NOTES TO THE FINANCIAL STATEMENTS

                                  Gross Cost and Exchange Revenue by Program
                                                               (Dollars in Millions)
                                                                      2014
                                               FSA                               OESE           OSERS         Other         Total
Increase College Access, Quality, and Completion
Gross Cost
  Intragovernmental                                             $ 31,267         $        -        $      -     $ 87        $31,354
  With the Public                                                 34,203                  -               -     4,189        38,392
  Total Gross Program Costs                                        65,470                 -               -     4,276        69,746

Earned Revenue
  Intragovernmental                                                (4,293)                -               -       (12)       (4,305)
  With the Public                                                 (24,686)                -               -       (40)      (24,726)
  Total Program Earned Revenue                                    (28,979)                -               -       (52)      (29,031)
Total Program Cost                                                 36,491                 -               -     4,224        40,715
Improve Preparation for College and Career from Birth Through 12th Grade, Especially for Children with
High Needs
Gross Cost
  Intragovernmental                                                       -             202               -            -        202
  With the Public                                                          -         23,196               -            4     23,200
  Total Gross Program Costs                                              -           23,398               -            4     23,402

Earned Revenue
  Intragovernmental                                                          -          (4)               -             -        (4)
  With the Public                                                            -         (11)               -             -       (11)
  Total Program Earned Revenue                                               -         (15)               -             -       (15)
Total Program Cost                                                           -       23,383               -            4     23,387
Ensure Effective Educational Opportunities for All Students
Gross Cost
  Intragovernmental                                                       -               -           115          30           145
  With the Public                                                          -              -        16,146         810        16,956
  Total Gross Program Costs                                              -                -        16,261         840        17,101
Earned Revenue
  Intragovernmental                                                          -            -             (2)             -        (2)
  With the Public                                                            -            -            (12)           (1)       (13)
  Total Program Earned Revenue                                               -            -            (14)           (1)       (15)
Total Program Cost                                                           -            -        16,247         839        17,086
Enhance the Education System’s Ability to Continuously Improve
Gross Cost
  Intragovernmental                                                       -               -               -       114            114
  With the Public                                                          -              -               -     1,932          1,932
  Total Gross Program Costs                                              -                -               -     2,046          2,046
Earned Revenue
  Intragovernmental                                                          -            -               -        (3)           (3)
  With the Public                                                            -            -               -       (61)          (61)
  Total Program Earned Revenue                                               -            -               -       (64)          (64)
Total Program Cost                                                           -            -               -     1,982          1,982

Net Cost of Operations                                            $36,491         $23,383         $16,247      $7,049       $83,170




FY 2014 Agency Financial Report—U.S. Department of Education                                                                        87
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS



                            Gross Cost and Exchange Revenue by Program
                                               (Dollars in Millions)
                                                      2013
                                                         FSA            OESE           OSERS            Other           Total
 Increase College Access, Quality, and Completion
 Gross Cost
   Intragovernmental                                   $ 28,513            $      -      $       -         $ 85         $28,598
   With the Public                                       (15,247)                 -              -         4,255        (10,992)
     Total Gross Program Costs                           13,266                   -              -         4,340          17,606
 Earned Revenue
   Intragovernmental                                      (3,685)                 -              -           (12)        (3,697)
   With the Public                                       (23,003)                 -              -           (44)       (23,047)
     Total Program Earned Revenue                        (26,688)                 -              -           (56)       (26,744)
 Total Program Cost                                      (13,422)                 -              -         4,284         (9,138)
 Improve Preparation for College and Career from Birth Through 12th Grade, Especially for Children with
 High Needs
 Gross Cost
   Intragovernmental                                            -            188                 -               -           188
   With the Public                                              -         24,676                 -               7        24,683
     Total Gross Program Costs                                  -         24,864                 -               7        24,871
 Earned Revenue
   Intragovernmental                                            -               (2)              -               -            (2)
   With the Public                                              -              (23)              -               -           (23)
   Total Program Earned Revenue                                 -            (25)                -               -           (25)
 Total Program Cost                                             -         24,839                 -               7        24,846
 Ensure Effective Educational Opportunities for All Students
 Gross Cost
   Intragovernmental                                            -                 -           48               30             78
   With the Public                                              -                 -       16,022              770         16,792
   Total Gross Program Costs                                    -                 -       16,070              800         16,870
 Earned Revenue
   Intragovernmental                                            -                 -            (1)               -            (1)
   With the Public                                              -                 -           (24)             (1)           (25)
     Total Program Earned Revenue                               -                 -           (25)             (1)           (26)
 Total Program Cost                                             -                 -       16,045              799         16,844

 Enhance the Education System’s Ability to Continuously Improve
 Gross Cost
   Intragovernmental                                            -                 -              -            62              62
   With the Public                                              -                 -              -         1,944           1,944
   Total Gross Program Costs                                    -                 -              -         2,006           2,006
 Earned Revenue
   Intragovernmental                                            -                 -              -            (2)             (2)
   With the Public                                              -                 -              -           (84)            (84)
     Total Program Earned Revenue                               -                 -              -           (86)            (86)
 Total Program Cost                                             -                 -              -         1,920           1,920


 Net Cost of Operations                                $(13,422)         $24,839         $16,045          $7,010        $34,472




88                                                                  FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                                                    FINANCIAL SECTION
                                                                                                   NOTES TO THE FINANCIAL STATEMENTS

Note 15. Interest Expense and Interest Revenue

For FY 2014 and FY 2013, interest expense and interest revenue by program consisted of the
following:
                                            Interest Expense and Interest Revenue
                                                                   (Dollars in Millions)
                                                                                                     2014
                                                                       Expenses                                       Revenue
                                                                         Non-                                           Non-
                                                        Federal                            Total            Federal              Total
                                                                        federal                                        federal


          Direct Loan Program                           $ 25,152         $        -        $25,152          $ 3,670   $ 21,482   $25,152
          FFEL Program :
             Guaranteed Loan Program                           2,083       (1,843)             240              240          -       240
             Loan Purchase Commitment                          1,163             -           1,163               64      1,099     1,163
             Loan Participation Purchase                       2,102             -           2,102              119      1,983     2,102
             ABCP Conduit                                         75             -              75               14         61        75
          TEACH Program                                           18             -              18                2         16        18
          Other Programs                                          35             -              35               11         40        51

          Total                                         $ 30,628       $ (1,843)           $28,785          $ 4,120   $ 24,681   $28,801


                                                                                                     2013
                                                                       Expenses                                       Revenue
                                                                         Non-                                           Non-
                                                        Federal                            Total            Federal              Total
                                                                        federal                                        federal

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

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


Federal interest expense is recognized on the Department’s outstanding borrowing from
Treasury (debt). The Direct Loan and FFEL Programs have $819 billion and $146 billion in
debt, respectively, as of September 30, 2014. 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 interest revenue.
Non-federal interest expense results from the amortization of loan subsidy. Non-federal interest
revenue is interest earned from the public on Credit Program Receivables held by the
Department. The Credit Program Receivable net balances for the Direct Loan and FFEL
Programs are $779 billion and $143 billion, respectively, as of September 30, 2014.




FY 2014 Agency Financial Report—U.S. Department of Education                                                                               89
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

Note 16. Statement of Budgetary Resources
The SBR compares budgetary resources with the status of those resources. As of
September 30, 2014, budgetary resources were $356 billion and net agency outlays were
$180 billion. As of September 30, 2013, budgetary resources were $360 billion and net agency
outlays were $189 billion.
Obligations Incurred by Apportionment Type and Category
Obligations incurred by apportionment type and category, as of September 30, 2014 and 2013,
consisted of the following:
                     Obligations Incurred by Apportionment Type and Category
                                                (Dollars in Millions)

                                                                                 2014                           2013
       Direct:
          Category A                                                     $             1,755           $             1,607
          Category B                                                                 329,043                       330,477
          Exempt from Apportionment                                                      194                           280
         Total Direct Apportionment                                                  330,992                       332,364
       Reimbursable:
         Category A                                                                          3                             4
         Category B                                                                         68                            49

       Obligations Incurred                                                  $       331,063           $           332,417


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. The apportionment categories are determined in accordance with
the guidance provided in OMB regulations. Category A apportionments are those resources
that can be obligated without restriction on the purpose of the obligation, other than to be in
compliance with legislation underlying programs for which the resources were made available.
Category B apportionments are restricted by purpose for which obligations can be incurred. In
addition, some resources are available without apportionment by OMB.
Unused Borrowing Authority
Unused borrowing authority and related changes in available borrowing authority, as of
September 30, 2014 and 2013, consisted of the following:
                                      Unused Borrowing Authority
                                                (Dollars in Millions)
                                                                                 2014                          2013
       Beginning Balance, Unused Borrowing Authority                     $            138,695          $            145,532
       Current Year Borrowing Authority                                               182,860                       195,185
       Funds Drawn From Treasury                                                    (173,451)                     (180,156)
       Borrowing Authority Withdrawn                                                 (86,777)                      (21,866)

       Ending Balance, Unused Borrowing Authority                            $          61,327         $           138,695


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




90                                                                  FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                                                   FINANCIAL SECTION
                                                                                                  NOTES TO THE FINANCIAL STATEMENTS

Undelivered Orders at the End of the Period
Undelivered orders, as of September 30, 2014 and 2013, consisted of the following:
                                                               Undelivered Orders
                                                                  (Dollars in Millions)

                                                                                                    2014                    2013
           Budgetary                                                                      $                53,332   $           56,901
           Non-Budgetary                                                                                   76,889              158,703

           Undelivered Orders (Unpaid)                                                    $            130,221      $          215,604


Undelivered orders at the end of the period, as presented above, will differ from the undelivered
orders included in Unexpended Appropriations. Undelivered orders represent the amount of
goods and/or services ordered which have not been actually or constructively received. This
amount includes any orders which may have been prepaid or advanced but for which delivery
or performance has not yet occurred. Undelivered orders for trust funds, reimbursable
agreements, and federal financing and liquidating funds are not funded through appropriations
and are not included in Unexpended Appropriations. (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 current fiscal year executed subsidy re-estimates and negative
subsidies. Distributed Offsetting Receipts, for the years ended September 30, 2014 and 2013,
consisted of the following:
                                                   Distributed Offsetting Receipts
                                                                  (Dollars in Millions)
                                                                                                    2014                    2013
           Negative Subsidies and Downward Re-estimates:
             FFEL Program                                                                     $             7,945       $           9,946
             Direct Loan Program                                                                           31,551                  38,436
             Facilities Loan Programs                                                                          24                     198
             TEACH Program                                                                                     13                      17
             Total Negative Subsidies and Downward Re-estimates                                            39,533                  48,597
           Other                                                                                              119                     128
           Distributed Offsetting Receipts                                                    $            39,652   $              48,725



Explanation of Differences Between the Statement of Budgetary
Resources and the Budget of the United States Government
The FY 2016 Budget of the United States Government (President’s Budget), which presents
the actual amounts for the year ended September 30, 2014, has not been published as of the
issue date of these financial statements. The FY 2016 President’s Budget is scheduled for
release in February 2015.




FY 2014 Agency Financial Report—U.S. Department of Education                                                                                91
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

A reconciliation of the FY 2013 SBR to the FY 2015 President’s Budget (FY 2013 actual
amounts) for budgetary resources, obligations incurred, distributed offsetting receipts, and net
agency outlays is presented below.

                             SBR to Budget of the United States Government
                                                      (Dollars in Millions)
                                                                                               Distributed
                                                  Budgetary             Obligations            Offsetting
                                                  Resources              Incurred               Receipts            Net Outlays

       Combined Statement of Budgetary
       Resources                                  $   359,939           $     332,417         $      48,725         $    189,379
         Expired Funds                                 (1,473)                   (575)                      -                     -
         Amounts Included in the President’s
         Budget                                        14,097                  14,091                       -                     -
         Amounts Excluded from President’s
         Budget and Rounding                                (4)                     (1)                   (9)                     -

         Distributed Offsetting Receipts                       -                      -                     -              48,725
       Budget of the United States
       Government1                                $   372,559           $     345,932         $      48,716         $    238,104
          1
           Amounts obtained from the Appendix, Budget of the United States Government, FY 2015.


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 Fund of the guaranty
agencies. Reconciling differences are caused by the presentation style of the President’s
Budget, which excludes Budgetary Resources, Obligations Incurred and Unobligated Balances
in expired annual funds, as well as offsetting collections, which are required for reporting on the
SBR. 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 Fund. Amounts reported on
the FY 2013 SBR for the Federal Fund are compiled through combining all guaranty agencies’
annual reports to determine a net valuation amount for the Federal Fund.
Note 17. Reconciliation of Net Cost of Operations to Budget
The Reconciliation of Net Cost of Operations to Budget reconciles the resources used to
finance activities, both those received through budgetary resources and those received through
other means, with the Net Cost of Operations on the Statement of Net Cost. This reconciliation
provides an explanation of the differences between budgetary and financial (proprietary)
accounting, as required by FASAB Standard No. 7, Accounting for Revenue and Other
Financing Sources and Concepts for Reconciling Budgetary and Financial Accounting.
Resources Used to Finance Activities (section one) are reconciled with the net cost of
operations by: (a) excluding Resources Used or Generated for Items Not Part of the Net Cost
of Operations (section two); and (b) including Components of the Net Cost of Operations That
Will Not Require or Generate Resources in the Current Period (section three). The primary
resources used to finance activities that do not fund the net cost of operations include the
acquisition of net credit program assets, the liquidation of liabilities for loan guarantees, and
subsidy re-estimates accrued in the prior period. Significant components of the net cost of
operations that will not generate or use resources in the current period include subsidy
amortization, interest on the liability for loan guarantees, and increases in exchange revenue
receivable from the public.



92                                                                        FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                                        FINANCIAL SECTION
                                                                                       NOTES TO THE FINANCIAL STATEMENTS

The Reconciliation of Net Cost of Operations to Budget, as of September 30, 2014 and 2013,
are presented below:
                              Reconciliation of Net Cost of Operations to Budget
                                                               (Dollars in Millions)

                                                                                                    2014             2013

 Resources Used to Finance Activities:
   Obligations Incurred                                                                     $         331,063    $     332,417
   Spending Authority from Offsetting Collections and Recoveries                                    (196,485)        (110,224)
   Offsetting Receipts                                                                               (39,652)         (48,725)
     Net Budgetary Resources Obligated                                                                 94,926          173,468
    Imputed Financing from Costs Absorbed by Others                                                        36               34
    Other Financing Sources                                                                          (36,767)         (51,054)
      Net Other Resources                                                                            (36,731)         (51,020)

 Net Resources Used to Finance Activities                                                             58,195          122,448



 Resources Used or Generated for Items Not Part of the Net Cost of Operations:
   (Increase)/Decrease in Budgetary Resources Obligated but Not Yet Provided                          85,345           14,721
   Resources that Fund Subsidy Re-estimates Accrued in Prior Period                                    2,383           (3,922)
   Credit Program Collections                                                                         80,365           58,352

    Acquisition of Fixed Assets                                                                            (4)              (1)
    Acquisition of Net Credit Program Assets or Liquidation of Liabilities for Loan
    Guarantees                                                                                      (186,999)        (191,789)
    Resources from Non-Entity Activity                                                                 36,787           51,229
      Net Resources That Do Not Finance the Net Cost of Operations                                     17,877         (71,410)

 Net Resources Used to Finance the Net Cost of Operations                                             76,072           51,038



 Components of the Net Cost of Operations That Will Not Require or Generate Resources in the Current Period:
   Change in Depreciation                                                               (1)                  6
   Subsidy Amortization and Interest on the Liability for Loan Guarantees          11,615                8,109
   Other                                                                               581                  27
     Total Components Not Requiring or Generating Resources                        12,195                8,142

    Increase/(Decrease) in Annual Leave Liability                                                           2              (1)
    Accrued Re-estimates of Credit Subsidy Expense                                                     20,130          (2,382)
    Increase in Exchange Revenue Receivable from the Public                                          (25,233)         (22,288)
    Change in Accrued Interest with Treasury                                                                2                2
    Other                                                                                                   2             (39)
       Total Components Requiring or Generating Resources in Future
       Periods                                                                                        (5,097)         (24,708)
    Total Components That Will Not Require or Generate Resources in the
    Current Period                                                                                     7,098          (16,566)


 Net Cost of Operations                                                                         $     83,170     $     34,472




FY 2014 Agency Financial Report—U.S. Department of Education                                                                  93
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

Note 18. Incidental Custodial Collections
The Department administers certain activities associated with the collection of non-exchange
revenues. The Department collects these amounts in a custodial capacity and transfers the
amounts collected to the General Fund of the Treasury at the end of each fiscal year. These
collections primarily consist of penalties on accounts receivable and are considered incidental
to the primary mission of the Department. During FY 2014 and FY 2013, the Department
collected $2.0 million and $0.1 million, respectively, in custodial revenues.
Note 19. Contingencies
The Department discloses contingencies where any of the conditions for liability recognition are
not met and there is at least a reasonable possibility that a loss or an additional loss may have
been incurred in accordance with FASAB Standard No. 5, Accounting for Liabilities of the
Federal Government. The following commitments are amounts for contractual arrangements
that may require future financial obligations.
Guaranty Agencies
The Department may assist guaranty agencies experiencing financial difficulties. No provision
has been made in the financial statements for potential liabilities. The Department has not done
so in fiscal years 2014 or 2013 and does not expect to in future years.
Federal Perkins Loan Program
The Federal Perkins Loan Program provides financial assistance to eligible postsecondary
school students. In FY 2014, 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
that ended June 30, 2014, approximately 538 thousand loans were made totaling $1.2 billion at
1,486 institutions, making an average of $2,170 per loan. The Department’s equity interest was
approximately $6.7 billion as of September 30, 2014.
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 the
Department’s financial position.
Other Matters
Some portion of the current-year financial assistance expenses (grants) may include funded
recipient expenditures that are subsequently disallowed through program review or audit
processes. In the opinion of management, the ultimate disposition of these matters will not
have a material effect on the Department’s financial position.




94                                                       FY 2014 Agency Financial Report—U.S. Department of Education
FY 2014 Agency Financial Report—U.S. Department of Education




                                                                                                                                                                                     United States Department of Education
                                                                                                                                                                                  Combining Statement of Budgetary Resources
                                                                                                                                                                                    For the Year Ended September 30, 2014



                                                                                                      89
                                                                                                                                                                                                             (Dollars in Millions)

                                                                                                                                                                                                                                                                              Office of         Office of Special
                                                                                                                                                                                                                                                                          Elementary and         Education and
                                                                                                                                                                                                                                                                            Secondary            Rehabilitative
                                                                                                 FY 2006 Performance and Accountability Report—U.S. Department of Education               Combined                                   Federal Student Aid                     Education              Services                         Other

                                                                                                                                                                                                      Non-Budgetary                                 Non-Budgetary                                                                            Non-Budgetary
                                                                                                                                                                                                      Credit Reform                                 Credit Reform                                                                            Credit Reform
                                                                                                                                                                                                        Financing                                     Financing                                                                                Financing
                                                                                                                                                                                  Budgetary             Accounts               Budgetary              Accounts              Budgetary              Budgetary             Budgetary             Accounts
                                                               Budgetary Resources:
                                                                Unobligated Balance, Brought Forward, October 1                                                               $         16,207 $               11,315 $                13,950 $             11,072 $                  793 $                   335 $             1,129 $                 243
                                                                Recoveries of Prior Year Unpaid Obligations                                                                              1,131                 97,274                     464               97,274                    433                     138                  96                     -
                                                                Other Changes in Unobligated Balance (+ or -)                                                                             (372)               (99,811)                   (148)             (99,806)                   (99)                    (43)                (82)                   (5)
                                                                Unobligated Balance from Prior Year Budget Authority, Net                                                     $         16,966 $                8,778 $                14,266 $              8,540 $                1,127 $                   430 $             1,143 $                 238
                                                                Appropriations (Discretionary and Mandatory)                                                                            95,004                    581                  49,854                  581                 21,634                  16,150               7,366                     -
                                                                Borrowing Authority (Discretionary and Mandatory) (Note 16)                                                                  -               182,860                        -              182,749                      -                       -                   -                   111
                                                                Spending Authority from Offsetting Collections (Discretionary and Mandatory)                                               473                 51,347                     411               51,281                      -                       2                  60                    66
                                                               Total Budgetary Resources (Note 16)                                                                            $        112,443 $             243,566 $                 64,531 $            243,151 $               22,761 $                16,582 $             8,569 $                 415

                                                               Status of Budgetary Resources:
                                                                Obligations Incurred (Note 16)                                                                                $         97,606    $          233,457      $            51,889   $          233,294    $            21,925      $           16,273    $          7,519    $              163
                                                                Unobligated Balance, End of Year:
                                                                 Apportioned                                                                                                            12,125                     69                  10,617                   69                      686                     49                773                     -
                                                                 Unapportioned                                                                                                           2,712                 10,040                   2,025                9,788                      150                    260                277                   252
                                                                Total Unobligated Balance, End of Year                                                                        $         14,837 $               10,109 $                12,642 $              9,857 $                    836 $                  309 $            1,050 $                 252
                                                               Total Status of Budgetary Resources (Note 16)                                                                  $        112,443 $             243,566 $                 64,531 $            243,151 $               22,761 $                16,582 $             8,569 $                 415

                                                               Change in Obligated Balance:
                                                                Unpaid Obligations
                                                                 Unpaid Obligations, Brought Forward, October 1                                                               $          59,630 $            161,747 $                 23,380 $             161,488 $              17,557 $                 8,858 $              9,835 $                259
                                                                 Obligations Incurred                                                                                                    97,606              233,457                   51,889               233,294                21,925                  16,273                7,519                  163




                                                                                                                                                                                                                                                                                                                                                                 REQUIRED SUPPLEMENTARY INFORMATION
                                                                 Outlays (Gross) (-)                                                                                                    (99,886)            (217,614)                 (53,339)             (217,404)              (23,101)                (16,072)              (7,374)                (210)
                                                                 Recoveries of Prior Year Unpaid Obligations (-)                                                                         (1,131)             (97,274)                    (464)              (97,274)                 (433)                   (138)                 (96)                   -
                                                                 Unpaid Obligations, End of Year                                                                              $          56,219 $             80,316 $                 21,466 $              80,104 $              15,948 $                 8,921 $              9,884 $                212
                                                                Uncollected Payments
                                                                 Uncollected Payments, Federal Sources, Brought Forward, October 1 (-)                                        $               (3) $                (25) $                   -   $               (3) $                      -   $                -    $               (3) $              (22)
                                                                 Change in Uncollected Payments, Federal Sources (+ or -)                                                                      2                    (1)                     -                   (1)                        -                    -                     2                   -
                                                                 Uncollected Payments, Federal Sources, End of Year (-)                                                       $               (1) $                (26) $                   -   $               (4) $                      -   $                -    $               (1) $              (22)
                                                                Memorandum (Non-add) Entries
                                                                 Obligated Balance, Start of Year (+ or -)                                                                    $         59,627 $             161,722 $                 23,380 $            161,485 $               17,557 $                 8,858 $             9,832 $                 237
                                                                 Obligated Balance, End of Year (+ or -)                                                                      $         56,218 $              80,290 $                 21,466 $             80,100 $               15,948 $                 8,921 $             9,883 $                 190
                                                               Budget Authority and Outlays, Net:




                                                                                                                                                                                                                                                                                                                                                                                                      FINANCIAL SECTION
                                                                Budget Authority, Gross (Discretionary and Mandatory)                                                         $         95,477 $             234,788 $                 50,265 $            234,611 $               21,634 $                16,152 $             7,426 $                 177
                                                                Actual Offsetting Collections (Discretionary and Mandatory) (-)                                                           (624)              (97,463)                    (542)             (97,375)                     -                      (2)                (80)                  (88)
                                                                Change in Uncollected Customer Payments from Federal Sources
                                                                (Discretionary and Mandatory) (+ or -)                                                                                        2                     (1)                     -                   (1)                        -                     -                   2                       -
                                                                Budget Authority, Net (Discretionary and Mandatory)                                                           $         94,855 $             137,324 $                 49,723 $            137,235 $               21,634 $                16,150 $             7,348 $                  89
                                                                Outlays, Gross (Discretionary and Mandatory)                                                                  $         99,886 $             217,614 $                 53,339 $            217,404 $               23,101 $                16,072 $             7,374 $                 210
                                                                Actual Offsetting Collections (Discretionary and Mandatory) (-)                                                           (624)               (97,463)                   (542)              (97,375)                    -                      (2)                (80)                  (88)
                                                                Outlays, Net (Discretionary and Mandatory)                                                                               99,262              120,151                   52,797              120,029                 23,101                 16,070                7,294                   122
                                                                Distributed Offsetting Receipts (-) (Note 16)                                                                           (39,652)                   -                  (39,559)                   -                      -                      -                  (93)                    -
95




                                                                Agency Outlays, Net (Discretionary and Mandatory) (Note 16)                                                   $          59,610 $            120,151      $            13,238 $            120,029    $            23,101      $          16,070     $          7,201 $                 122
                                                                                                                                                                      United States Department of Education
                                                                                                                                                                   Combining Statement of Budgetary Resources
96




                                                                                                                                                                                                                                                                                                                                                            REQUIRED SUPPLEMENTARY INFORMATION
                                                                                                                                                                                                                                                                                                                                                                                                 FINANCIAL SECTION
                                                                                                                                                                     For the Year Ended September 30, 2013
                                                                                                                                                                                                   (Dollars in Millions)

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

                                                                                                                                                                                  Non-Budgetary                                  Non-Budgetary                                                                                             Non-Budgetary
                                                                             FY 2006 Performance and Accountability Report—U.S. Department of Education


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

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

                                                               Change in Obligated Balance:
                                                                Unpaid Obligations
                                                                 Unpaid Obligations, Brought Forward, October 1                                           $          65,057 $             172,230 $               24,093 $               171,959 $            15,902 $                 9,248 $              6,115 $            9,699 $                271
                                                                 Obligation Incurred                                                                                 86,337               246,080                 41,797                 245,639              21,314                  15,730                     2             7,494                  441
                                                                 Outlays (Gross) (-)                                                                               (90,573)             (221,138)               (42,153)               (220,685)            (22,389)                (16,032)              (2,612)            (7,387)                (453)
FY 2014 Agency Financial Report—U.S. Department of Education




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

                                                               Budget Authority and Outlays, Net:
                                                                Budget Authority, Gross (Discretionary and Mandatory)                                     $         89,159 $             242,166 $                45,289 $              241,896 $            20,819 $                 15,624 $                   - $          7,427 $                270
                                                                Actual Offsetting Collections (Discretionary and Mandatory) (-)                                      (935)               (72,672)                  (844)                (72,601)                  -                       (2)                    -              (89)                 (71)
                                                                Change in Uncollected Customer Payments from Federal Sources
                                                                (Discretionary and Mandatory) (+ or -)                                                                  (1)                    1                       -                      1                   -                        -                     -               (1)                    -
                                                               Budget Authority, Net (Discretionary and Mandatory)                                        $         88,223 $             169,495 $                44,445 $              169,296 $            20,819 $                 15,622 $                   - $          7,337 $                 199
                                                                Outlays, Gross (Discretionary and Mandatory)                                              $          90,573 $            221,138 $                42,153 $              220,685 $            22,389 $                 16,032 $             2,612 $            7,387 $                453
                                                                Actual Offsetting Collections (Discretionary and Mandatory) (-)                                       (935)              (72,672)                  (844)                (72,601)                  -                       (2)                  -                (89)                 (71)
                                                                Outlays, Net (Discretionary and Mandatory)                                                           89,638              148,466                  41,309                148,084              22,389                   16,030               2,612              7,298                  382
                                                                Distributed Offsetting Receipts (-) (Note 16)                                                      (48,725)                     -               (48,445)                       -                  -                         -                  -              (280)                     -
                                                               Agency Outlays, Net (Discretionary and Mandatory) (Note 16)                                $         40,913 $             148,466 $               (7,136) $              148,084 $            22,389 $                 16,030 $             2,612 $            7,018 $                 382
                                                                             FINANCIAL SECTION



           Required Supplementary Stewardship Information
Required Supplementary Stewardship Information (RSSI), per OMB Circular A-136
guidance, requires disclosure of investments in human capital and the related program
outcomes resulting from stewardship expense outlays.

Stewardship Expenses

Stewardship expenses are substantial investments by the federal government for the long-
term benefit of the nation. Because costs of stewardship resources are treated as expenses
in the financial statements in the year the costs are incurred, they are reported as RSSI to
highlight the benefit nature of the costs and to demonstrate accountability.

Within the United States, state, local, and private sources are responsible for the majority of
the estimated $1 trillion spent nationwide on all levels of education. Funding from non-
federal sources provides a large portion of K-12 education, according to the National Center
for Education Statistics. Public and private organizations of all kinds establish schools and
colleges, develop curricula, and determine requirements for enrollment and graduation. The
Department’s elementary and secondary programs annually serve approximately 50 million
students in 16,900 school districts.

Within federal funding, the Department provides grant, loan, loan forgiveness, and work-
study assistance to more than 13 million postsecondary students. Today, the Department
operates programs that encompass every area and level of education, with discretionary
spending constituting the majority of the Department’s budget and programs. Loan
disbursements represented the bulk of the Department’s $317.5 billion in gross outlays for
FY 2014. However, grant making overall represented 24.7 percent of those outlays,
consisting of discretionary (total $78.4 billion), formula, and needs-based grants. For a
detailed breakdown of these components and of the Budget as a whole, please refer to the
FY 2015 Budget Summary, as well as the Summary of Human Capital Expenses table in
the next section below.

Discretionary grants, such as TRIO, Race to the Top, and the Teacher Incentive Fund, are
awarded on a competitive basis. When funds for these grants are exhausted, they will
cease to be funded. The Department reviews discretionary grant applications using:

    a formal review process for selection,
    both legislative and regulatory requirements,
    published selection criteria established for individual programs, and
    discretion to determine which applications best address the program requirements and
     selection criteria and are, therefore, most worthy of funding.

Alternatively, formula grants, such as Title I and Title III of the Elementary and Secondary
Education Act (ESEA), are not competitive. The majority go to school districts on a formula
basis and:

    provide funds as dictated by a law,
    allocate to districts on a per-student basis, and
    schools may apply for and receive formula grants annually.




FY 2014 Agency Financial Report—U.S. Department of Education                                 97
FINANCIAL SECTION
REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION

Lastly, need-based grants, including the Federal Pell grant, Federal Work Study, and the
Federal Supplemental Educational Opportunity Grant (FSEOG), are based on family
income and economic eligibility. While there are many state, institution (college or school),
and privately sourced need-based grants, most need-based grants are funded by the
federal government where the financial aid formula is determined by a combination of
factors, including:

    family income,
    expected contribution of a family,
    number of dependent family members, and
    student status.

Investment in Human Capital

Human capital investments are defined similarly by the OMB Circular A-136 and the
Statement of Federal Financial Accounting Standards (SFFAS) No. 8, Supplementary
Stewardship Reporting, as expenses for education and training programs intended to:

    increase or maintain national economic productive capacity, and
    produce effective outputs and outcomes that provide evidence of increasing or
     maintaining national productive capacity.

The amounts reported as investments in the Summary of Human Capital Expenses table
below represent the majority of costs on the Statement of Net Cost. These are the costs of
the Department representing human investments by their nature.

The 2015 Budget request for the Department focuses on six priorities:

(1) increasing equity and opportunity for all students,
(2) strengthening support for teachers and school leaders,
(3) expanding high-quality preschool programs,
(4) augmenting affordability and quality in postsecondary education,
(5) promoting educational innovation and improvement, and
(6) improving school safety and climate.




98                                                   FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                             FINANCIAL SECTION
                                                                REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION


                                    Summary of Human Capital Expenses
                                                         (Dollars in Millions)


                                                         2014            2013           2012            2011           2010

Federal Student Aid Expense
  Direct Loan Subsidy                                    $ 8,126     $ (39,557)     $ (10,720)     $ (28,630)      $    (1,567)

  Federal Family Education Loan                           (6,585)         (8,753)       (14,381)        (16,126)       (14,344)
  Program Subsidy
  Perkins Loans, Pell and Other Grants                    33,098          33,542         34,310          39,008         26,799
                                                               206           222            192             193            208
Salaries and Administrative
   Subtotal                                               34,845         (14,546)         9,401          (5,555)        11,096
Other Departmental

  Elementary and Secondary Education                      22,832          22,221         22,137          21,195         21,608

  Special Education and Rehabilitative
                                                          15,948          15,919         16,139          15,357         15,227
  Services

  American Recovery and Reinvestment                             -         2,623          7,651          27,945         44,019
  Act and Education Jobs Fund

                                                           6,938           6,175          6,211           7,341          7,067
  Other Departmental Programs
                                                               667           703            481             504            502
Salaries and Administrative
   Subtotal                                               46,385          47,641         52,619          72,342         88,423
Grand Total                                          $    81,230     $    33,095    $    62,020     $    66,787    $    99,519




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

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

The offices of Elementary and Secondary Education; Special Education and Rehabilitative
Services; Innovation and Improvement; English Language Acquisition; Career, Technical,
and Adult Education; and Postsecondary Education provide leadership, technical
assistance, and financial support to state and local educational agencies, institutions of
higher education, and not-for-profit organizations for reform, strategic investment, and
innovation.



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FINANCIAL SECTION
REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION

Institute of Education Sciences is the internal research arm of the Department. Its goal is
the transformation of education into an evidence-based field where decision makers
routinely seek out the best available research and data before adopting programs or
practices that will affect significant numbers of students. The Department’s organizational
listing of offices is available on the Department’s website.

Program Outcomes

Dramatically boosting completion rates for bachelor’s and associate degrees is essential for
Americans to compete in a global economy. Education is the stepping stone to higher living
standards for American citizens and is vital to national economic growth and security.
Economic outcomes, such as wage and salary levels, have historically correlated with
individuals’ educational attainments and the high level skills employers expect of those
entering the labor force. Like all investments, developing higher-level skills involves costs
and benefits. Other potential returns may include: increased job opportunities; jobs that are
less sensitive to general economic conditions; improved employability of a person over
one’s lifetime; and economic well-being of the nation through increased national
productivity.

Improving education increases the equity of opportunity for every child to succeed. As a
nation, we are making progress: High school graduation rates are at their highest ever
(80 percent), dropout rates have gone down sharply, NAEP is at its highest ever for
4th/8th grade reading/math, and college enrollment has gone up. Our greatest progress has
been in places with the boldest and most sustained commitment to reform.

The Department administers federal investments, including Titles I, II, and III of the
Elementary and Secondary Education Act (ESEA), as well as the Individuals with
Disabilities Education Act (IDEA), and provides guidance and technical assistance to states
to ensure that teachers and principals are well prepared and students have the resources
and support needed to graduate from high school ready for college and careers.

Unemployment Rate. As depicted in the graph below, individuals with lower levels of
educational attainment are more likely to be unemployed than those individuals with higher
levels of educational attainment. The September 2014 Department of Labor unemployment
rate for adults (25 years old and over) who had not completed high school was 9.1 percent,
compared with 6.2 percent for those with four years of high school and 3.2 percent for those
with a bachelor’s degree or higher. Younger people with only high school diplomas tended
to have higher unemployment rates than adults 25 and over with similar levels of education.




100                                                  FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                                          FINANCIAL SECTION
                                                                             REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION


                                  Unemployment Rate by Educational Level
      16%
      14%
      12%
      10%
       8%
       6%
       4%
       2%
       0%
                    2007              2008              2009                2010        2011              2012              2013               2014

                                  College Degree                       High School Degree                    No High School Degree

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

Annual Income. As depicted in the two graphs below, according to the September 2014
Department of Labor data, annualized median income for adults (25 years old and over)
varied considerably by education level as follows:

       Men with a high school diploma earned $38,324, compared with $71,604 for men with a
        college degree.
       Women with a high school diploma earned $30,368, compared with $54,548 for women
        with a college degree.
       Men and women with college degrees earned 80 percent more than men and women
        with high school diplomas.
       These returns on investment in education directly translate into the advancement of the
        American economy as a whole.

          Annualized Median Income for Men                                            Annualized Median Income for Women
         (25 Years Old and Over), 2010–2014*                                           (25 Years Old and Over), 2010–2014*

 $75,000                                                                           $75,000

 $60,000                                                                           $60,000

 $45,000                                                                           $45,000

 $30,000                                                                           $30,000

 $15,000                                                                           $15,000

         $0                                                                             $0
                  2010         2011         2012         2013         2014                       2010         2011         2012         2013          2014
                                Men With a High School Degree                                                Women With a High School Degree
                                Men With a College Degree                                                    Women With a College Degree

    * The 2011–2014 data are annualized as of September of each year; the          * The 2011–2014 data are annualized as of September of each year; the
    2010 data are annualized as of July of that year.                              2010 data are annualized as of July of that year.




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



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Other Information
OTHER INFORMATION



                    About the Other Information Section
This section includes improper payments reporting details, the schedule of spending,
summary of assurances, a summary of the Office of Inspector General management and
performance challenges for FY 2015, and Freeze the Footprint information. Additional
information is available at the links provided. The Department welcomes comments from
readers to improve the report.

Improper Payments Reporting Details

The Improper Payments Reporting Details summarizes the Department’s efforts to identify,
recover, and prevent improper payments. It includes the data required to be reported
annually to the President and Congress on assessments of risk, estimates of improper
payments, actions to mitigate improper payments, and recoveries of improper payments.

Schedule of Spending

The Schedule of Spending (SOS) presents total amounts to be spent by the Department
broken out by (a) what money was available to spend, (b) how the money was spent, and
(c) who the money went to. For information on spending, USASpending.gov is a searchable
website provided by the Office of Management and Budget (OMB) that provides information
on federal awards and is accessible to the public at no cost.

Summary of Financial Statement Audit and Management
Assurances

This summary table provides information on any material weaknesses reported by the
agency or through the audit process.

Office of Inspector General’s Management and Performance
Challenges

The Office of Inspector General’s Management and Performance Challenges for Fiscal
Year 2015 report is summarized in this section. The FY 2015 management challenges are:
(1) Improper Payments, (2) Information Technology Security, (3) Oversight and Monitoring,
(4) Data Quality and Reporting, and (5) Information Technology System Development and
Implementation. These challenges reflect continuing vulnerabilities and emerging issues
faced by the Department as identified through the OIG’s recent audit, inspection, and
investigative work. For the full report, including the Department’s response, visit the OIG
website.

Freeze the Footprint

The Freeze the Footprint summarizes the Department’s efforts in promoting efficient
spending to support the agency’s operations in accordance with OMB Management
Procedures Memorandum 2013-02, the Freeze the Footprint policy implementing guidance,
which states that all CFO Act departments and agencies shall not increase the total square
footage of their domestic office and warehouse inventory compared to an FY 2012
baseline. OMB is working in partnership with the General Services Administration to better
align the size of the federal real property inventory.



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                          Improper Payments Reporting Details
The Department is committed to preventing improper payments with front-end controls, and
detecting and recovering them if they occur. In FY 2014, the Department continued efforts
to: 1) assess the risk of improper payments, 2) estimate improper payments, 3) address
root causes of improper payments, and 4) recover improper payments. These four efforts
are described in more detail below.

The Department implemented actions that meet the requirements of the Improper
Payments Elimination and Recovery Improvement Act of 2012 (IPERIA) (Public Law 112-
248) and the Improper Payments Elimination and Recovery Act of 2010 (IPERA) (Public
Law 111-204), both of which amend the Improper Payments Information Act of 2002 (IPIA)
(Public Law 107-300), as well as the Office of Management and Budget’s (OMB) Circular
A-123, Appendix C, Requirements for Effective Measurement and Remediation of Improper
Payments. Agencies are required to review and assess all programs and activities to
identify those susceptible to significant improper payments. The OMB guidance defines
significant improper payments as those in any particular program that exceed both 1.5
percent of program payments and $10 million annually or that exceed $100 million. OMB
also has established specific reporting requirements for agencies with programs that
possess a significant risk of erroneous payments and for reporting on the results of
recovery auditing activities.

Internal Controls and Accountability

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

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



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      grantee risk and assist in the determination of special conditions for grant awards. In
      FY 2014, RMS produced 112 reports assessing risk for 1,214 grant applicants to new
      discretionary grant awards, and 141 reports assessing risk for 2,984 discretionary
      grantees. These reports were used to review 95 new award competitions, and
      84 non-competitive continuations (NCCs).
     The Department coordinates and manages the resolution of internal and external
      audits, which includes working with program managers, the Office of General Counsel,
      and impacted parties to collect debt associated with improper payments.
     The Department leverages a continuous controls monitoring process to help detect
      anomalies and potential issues in agency payment-related data, including Department
      and FSA payments made through the core financial system.

Risk Assessments

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

                                         Risk Assessment Results
                                                                          Last Risk                  Risk-
                               Program
                                                                         Assessment               Susceptible?
    FSA Managed Programs
      Federal Pell Grants                                                   FY 2014                      Yes
      The Teacher Education Assistance for College and
                                                                            FY 2014                       No
      Higher Education Grant
      Federal Supplemental Educational Opportunity Grant                    FY 2014                       No
      Iraq and Afghanistan Service Grant                                    FY 2014                       No
      Federal Perkins Loan Program                                          FY 2014                       No
      Federal Direct Loan Program                                           FY 2014                      Yes
      Federal Family Education Loan Program                                 FY 2014                     Yes(1)
      Federal Work-Study Program                                            FY 2014                       No
    Other Department Programs
      Title I                                                               FY 2013                     No(2)
      Other Grant Programs                                                  FY 2013                       No
      Contract Payments                                                     FY 2013                       No
      Administrative Payments                                               FY 2014                       No
      (1) FFEL, as a program that had previously been determined to be risk-susceptible, must first report
      improper payment estimates that are less than the stated thresholds for a minimum of two consecutive
      years before formally reclassifying the program’s risk categorization. FFEL was estimated below the
      threshold for high-risk programs in FY 2013 and FY 2014.
      (2) Title I is included in the table because it is a Section 57 program.




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FSA-Managed Programs

The Department performed a risk assessment for all FSA-managed programs during
FY 2014 and determined that the Pell Grant and Direct Loan programs were susceptible to
risk of significant improper payments. For each program, risk assessment meetings were
held with program owners, key personnel, and other designees to discuss the inherent risk
of improper payments as it relates to the following ten risk factors:

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

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

The risk assessment results found that, in FY 2014, the FFEL program is low risk (i.e., not
risk susceptible to significant improper payments). This determination is corroborated by the
prior year (FY 2013) estimate of 0 percent, which is well below the risk-susceptible
thresholds of 1.5 percent and $10 million in estimated error or $100 million in estimated
error as defined in OMB Circular A-123, Appendix C. While FFEL has been assessed as
low risk this year, a FFEL estimate was still performed and is presented here. Consistent
with OMB guidance, any program that has previously been determined to be risk-
susceptible must first report improper payment estimates that are less than the stated
thresholds for a minimum of two consecutive years before formally reclassifying the
program’s risk categorization. We will coordinate with OMB in FY 2015 to formally change
this risk categorization and, in so doing, remove the requirement for future annual reporting
of FFEL estimates.

Other Department Programs

The Department performed a risk assessment for all non-FSA grant programs during
FY 2013 using the methodology described in the FY 2011 AFR. This methodology relies on
an examination of the total questioned costs for each program that result from required
OMB Circular A-133 Single Audits. The Department’s FY 2013 assessment determined that




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none of these non-FSA grant programs were susceptible to significant improper payments.
The specific grant programs reviewed are provided on the Department’s website.

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

In 2014, the Department also completed risk assessments on administrative payments to
employees in accordance with IPERIA. Five areas of administrative payments were
examined: Salary, Locality Pay, Travel, Purchase Card, and Transit Benefits. The
Department determined it was not susceptible to significant improper administrative
payments to employees. This analysis was based on a review of actual recaptured
payments and the likelihood of payment errors. Each respective administrative payment
area noted above was below the risk threshold designated for susceptibility.

Improper Payment Estimate Methodologies

FSA-Managed Programs

After refining the FY 2013 alternative estimation methodology, the Department obtained
approval from OMB to use an alternative methodology for estimating improper payments for
the FSA programs for FY 2014 and forward. This alternative methodology, as contemplated
in OMB Circular A-123, Appendix C (A-123C), leverages data collected through FSA
Program Reviews, which include procedures such as verifying student-reported income
levels, student academic performance, and eligibility on the disbursed funds for a sample of
students in each review. The methodologies for all three programs are described on the
Department’s improper payment website.

In addition to the rate that resulted from the OMB-approved methodology, the Department
has, consistent with prior years, estimated an improper payment rate for the Pell program
using Internal Revenue Service (IRS) data. This estimate is provided as a supplemental
data point for comparison to prior year estimates calculated under that methodology.

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

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




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                                                            Improper Payment Estimates (Dollars in Millions)

                                                             Program or
                                                                                         FY 2013                    FY 2014                        FY 2015                     FY 2016                     FY 2017
                                                               Activity
                                                                               Outlays                    Outlays                        Outlays                     Outlays                      Outlays
                                                                                       IP %        IP $              IP %         IP $              IP %     IP $               IP %       IP $           IP %        IP $
                                                                                $(2)                       $(3)                           $(4)                        $(4)                         $(4)
                                                            Pell Grants(1) 32,338         2.26     731    31,554      2.16        682    32,456     2.15      698    33,135      2.14      709    34,767     2.13     740

                                                             Direct Loan 102,497 1.03              1,056 102,140      1.50        1,532 100,936     1.49     1,504 106,057       1.48     1,570 111,473 1.46         1,628

                                                                 FFEL           10,817    0.00      0     10,016      0.00         0     8,004      0.00       0      7,458      0.00       0      7,101     0.00      0

                                                                 Title I        14,724    .385     56.7   16,372      .214        35.0   16,062     .214     34.4    15,394      .214      32.9   15,442     .214     33.0


                                                            (1) ThePell estimate for FY 2013 was reported using the previously developed methodology that relies on a comparison of student data with IRS data. In
                                                            FY 2014, OMB approved the alternative methodology relying on FSA Program Reviews, and the Pell estimates are reported using the updated methodology. As
                                                            a point of comparison, the FY 2014 preliminary estimate for Pell using the previous methodology that relies on data from comparing student data with IRS data is
                                                            1.94 percent or $612 million.
                                                            (2) The   source of FY 2013 outlays for all programs is FMS as presented in the FY 2013 AFR.




                                                                                                                                                                                                                               IMPROPER PAYMENTS REPORTING DETAILS
                                                            (3) The   source of FY 2014 outlays for all program amounts is FMS.

                                                                  source of FY 2015–2017 Pell outlay amounts is the supporting documentation for the FY 2014 President’s Budget request at the Mid-Session Review.
                                                            (4) The

                                                            The source of FY 2015–2017 Direct Loan and FFEL outlay amounts is the supporting documentation for the FY 2014 President’s Budget request.

                                                            NOTE: The FY 2014 Pell overpayment improper payment rate estimate is 2.11 percent or $666 million and the underpayment improper payment rate estimate is
                                                            0.05 percent or $16 million. The FY 2014 Direct Loan overpayment improper payment rate estimate is 1.46 percent or $1,491 million and the underpayment
                                                            improper payment rate estimate is 0.04 percent or $41 million. The FY 2014 FFEL overpayment and underpayment improper payment rate estimates round




                                                                                                                                                                                                                                                                     OTHER INFORMATION
                                                            down to 0.000 percent or $0 million.
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Root Causes and Corrective Actions

This section summarizes the root causes of improper payments and the Department’s
strategies to mitigate improper payments.

FSA-Managed Programs

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

In the charts that follow for each risk-susceptible program, the root causes presented were
identified through improper payment testing and categorized using categories of error as
defined in the March 2010 update to OMB Circular A-123, Appendix C (OMB Memorandum
M-10-13). The corrective actions presented are recommendations to the schools (for Pell
Grants and Direct Loans) and financial institutions (for FFEL) for findings that resulted from
FSA Program Reviews.

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

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

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

  IPIA Error Category                                    Root Cause
Documentation and        Incorrect awards based on Expected Family Contribution (EFC)
Administrative Errors    Incorrect processing of student data during normal operations
                         Student account data changes not applied or processed correctly
Verification Errors      Ineligibility for a Pell Grant/Direct Loan
                         (e.g., validity of high school attended, history of degrees obtained)
                         Satisfactory academic progress not achieved
                         Incorrectly calculated return period

Improper payment findings are detailed within the FSA Program Reviews, which also
include the corrective actions taken by the schools or financial institutions to either resolve
the finding or finding(s) that contain liabilities or detail their ongoing corrective actions.
Overall, FSA necessitates that all findings identified during the FSA Program Reviews are
tracked through resolution via the Postsecondary Education Participants System (PEPS).
This corrective action process is further described in the FY 2012 AFR.




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Root Causes and Corrective Actions for the Direct Loan Consolidation Program

      IPIA Error Category                                              Root Cause
Documentation and                          Incorrect processing of Loan Verification Certificate (LVC)
Administrative Errors                      Processing of duplicate LVCs
                                           Loan not intended for consolidation was processed
                                           Incorrect information submitted on the LVC and processed

The underlying root cause of improper payments identified for Direct Loan Consolidations in
the table above is due to processing errors at the servicer level. However, the legacy
servicer’s contract is ending and the day-to-day servicing of newly made traditional Direct
Loan Consolidations has been transferred to the Title IV Additional Servicers’ (TIVAS)
platforms. FSA will continue to monitor the full transition of the consolidation function to
these servicers.

Improper payments identified through testing of Direct Loan Consolidations for FY 2014
were remediated or are in the process of being remediated.

FFEL Program. During FY 2014, the FFEL Program made no new loan originations.
FY 2014 payment types and cash flows associated with the guarantees on loans originated
in prior years (i.e., the existing FFEL portfolio) include: Special Allowance Payments (SAP),
Interest Benefits, Lender Fees, Origination Fees, Consolidation Loan Rebate Fees,
Reinsurance, and Account Maintenance Fees.

Root Causes and Corrective Actions for the FFEL Program

Most of the reporting errors observed during FY 2014 were the result of smaller lenders
using software systems that were not updated or were processed on bank systems not
designed for processing the reporting of FFEL program loans.

      IPIA Error Category                                               Root Cause
Documentation and                          Manual entries processed erroneously
Administrative Errors                      (e.g., using only one payment code during the billing quarter when an
                                           activity occurred that required the use of two billing codes)
                                           Incorrect calculation of the average daily balance due to software
                                           formula errors

Corrective actions include recommendations to the financial institutions for findings that
resulted from FSA Program Reviews, which include, but are not limited to: regularly conduct
staff training courses designed to prevent incorrect usage of payment codes, including SAP
codes, and incorrect calculation of average daily balances; establish procedures that
eliminate reporting errors related to manual entries processed erroneously; hire sufficient
staff/employees who are knowledgeable of the FFEL program; and obtain and install any
necessary updates to their systems to certify software formulas are accurate.

If unable to perform servicing requirements, lenders are required to seek the services of
other individuals or firms to reduce and eliminate reporting errors due to manual
processing.




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Root Cause Summary

Consistent with FY 2013, the results of the root cause analysis across all risk-susceptible
FSA programs for FY 2014 highlighted that the underlying root cause of improper payments
was due to processing errors that occur at the institution level.

Further analysis of the improper payment findings and associated root causes identified for
FSA programs were attributed to Documentation and Administrative Errors and Verification
Errors (as defined by IPIA) by the following percentages, calculated by dollar amount (i.e.,
the absolute dollar amount of improper payments identified within the category proportional
to the total dollar amount of error in the sample reviewed):

                                             Pell          Direct           Direct Loan
          IPIA Error Category                                                                           FFEL
                                            Grants         Loans           Consolidations
Documentation and Administrative
                                             15%            19%                    100%                 100%
Errors
Verification Errors                          85%            81%                     0%                   0%

Other Department Programs

Risk Management. The Department continues to take measures to prevent improper
payments through the application of the Entity Risk Review (ERR) report by grants officers
and awarding officials in the preaward stage of the grants process. Using data drawn from
the Federal Audit Clearinghouse, Dun & Bradstreet, the Department’s grants system, and
Institutes of Higher Education (IHE) accreditation reporting, this report identifies financial,
programmatic, and controls risks posed by award to the prospective grantee. Program staff
apply this report in devising special conditions of award, as well as monitoring plans for the
life of the grant, strengthening them as the Department’s first line of defense against
improper payments by grantees.

Do Not Pay. The Department continues to mitigate risk of improper payments by leveraging
available data to detect and prevent payments before they occur. These data are collected
through the Continuous Control Monitoring System (CCMS), which applies seven integrity
checks that are used as systemic preventive and predictive analytic tools to mitigate risks
related to improper payments. Two additional integrity checks were implemented in
FY 2014 that increased the reliability of transactional controls and the effectiveness of
antifraud controls. The Department also participates in the Department of Treasury Do Not
Pay System initiative. Both of these preventive processes allow the Department to conduct
research and investigation of any findings in order to initiate proper actions.




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         Implementation of the Do Not Pay Initiative to Prevent Improper Payments
                      Number                                                                 Number      Dollars
                       (#) of                                                                  (#) of      ($) of
                     payments              Dollars ($) of                                   improper    improper
                     reviewed               payments            Number      Dollars         payments    payments
                        for                reviewed for           (#) of      ($) of        reviewed    reviewed
                     improper                improper          payments    payments          and not     and not
                     payments               payments            stopped     stopped          stopped     stopped
Reviews with
the Death
Master File
(DMF) only               998,447        $138,196,388,434               0             0              0           0
Reviews with
System for
Award
Management
(SAM)
databases             1,005,029         $140,864,372,529               0             0              0           0


Data Analytics. The Department leverages data analytics techniques to help reduce the
risk of improper payments and to better identify and address root causes of error. The
Department gathers and manages thousands of records on audits of grantees in an Audit
Accountability and Resolution Tracking System (AARTS). The Department is analyzing the
audit data to determine trends in findings and resolution throughout the Department; these
data enable the Department to search for and better understand commonalities in findings
as well as grantees with repeat findings. This analytics effort is helping the Department
reduce improper payments by strengthening audit resolution and grants management.

Recovery Auditing

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

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

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

Contract Payment Recapture Audits. Although the Department has not found prior
contract recovery audits to be cost effective, the Department issued a contingency-based
contract during FY 2013 to audit all FY 2007 through FY 2012 contract payments for
possible errors and recapture. This contract was awarded with the expectation that



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advances in data mining techniques might be able to detect payment errors that were
previously undetected.

The audit ended in January 2014 and did not uncover any improper payments. In addition
to the audit, as part of its A-123 review, the Department reviewed a random sample of
contract payments made in FY 2014 and similarly did not uncover any improper payments
subject to recovery. As a result of these efforts, the Department plans no further efforts to
conduct recapture audits.

The following chart presents the results of previous recapture efforts:

                            Contract Payment Recapture Audit Reporting
                                          ($ in millions)
       Amount Subject to Review for Current Year (2014) Reporting*                                  $10,027
       Actual Amount Reviewed and Reported (2014)*                                                  $10,027
       Amounts Identified for Recovery (2014)                                                          $0
       Amounts Recovered (2014)                                                                        $0
       % of Amount Recovered out of Amount Identified (2014)                                           NA
       Amount Outstanding (2014)                                                                       $0
       % Amount Outstanding out of Amount Identified (2014)                                            NA
       Amount Determined Not to be Collectable (2014)                                                  $0
       % Amount Determined Not to be Collectable out of Amount Identified (2014)                       NA
       Amounts Identified for Recovery Prior Years (2005–14)                                           $0
       Amounts Recovered (2005–14)                                                                     $0
       Cumulative Amounts Identified for Recovery (2005–14)                                            $0
       Cumulative Amounts Recovered (2005–14)                                                          $0
       Cumulative Amounts Outstanding (2005–14)                                                        $0
       Cumulative Amounts Determined Not to be Collectable (2005–14)                                   $0
      *Includes FY 2007 through FY 2012 contract payments subject to the FY 2013–2014 recapture audit
      contract.

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

Recoveries of Improper Payments. The Department works with grantees and Title IV
(FSA) program participants to resolve and recover amounts identified in Compliance Audits,
OIG Audits, and Department-conducted program reviews as potential improper payments.
Accounts receivable are established for amounts determined to be due to the Department
and collection actions are pursued. Recipients of Department funds can appeal the
management decisions regarding funds to be returned to the Department, thereby delaying



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or decreasing the amounts the Department is able to collect. The following chart provides
estimates of the amounts identified and recovered through all Compliance Audits, OIG
Audits, and Program Reviews for FY 2012 through FY 2014. The Department anticipates
recovering similar amounts in FY 2015.

                     Overpayments Recaptured Outside of Payment Recapture Audits
                                              ($ in millions)
       Agency           Amount     Amount     Amount       Amount    Cumulative   Cumulative
       Source          Identified Recovered Identified Recovered       Amount       Amount
                      (FY 2014) (FY 2014)(1) (FY 2013) (FY 2013)(1)   Identified   Recovered
                                                                    (FY 2012–14) (FY 2012–14)
Compliance
                           26.3             14.6               19.8   7.7            67.8                26.6
Audit Reports
OIG Audit
                            0.4              0.7               22.1   5.2            25.2                 6.1
Reports
Program
                           47.7             18.5               38.9   8.0            117.3               33.2
Reviews
(1)   Includes all amounts recovered during the year, not just the recoveries of amounts identified during the year.

In addition to the amounts above, for the Pell Grant Program, recoveries also occur when
overpayments to students are assigned to FSA for collection. Pell amounts recovered
through student debt collection were approximately $13.7 million in FY 2014, $13.0 million
in FY 2013, and $113.7 million cumulative from FY 2004 to FY 2014. While all programs
may have student debts transferred to debt collection, the categorization of resulting
collections as an improper payment recovery is unique to Pell. Unlike loans, Pell Grant
payments transferred to debt collection commonly indicate a potential improper payment at
time of disbursement.

Statutory and Regulatory Barriers

The Department believes that there are high burden of proof requirements in the General
Education Provisions Act (GEPA), which are a significant reason why the Department
recovers only a small percentage of the original questioned costs in non-FSA grant program
audits. The GEPA, 20 U.S.C. 31 Subchapter IV § 1234a, requires the Department to
establish a prima facie case for the recovery of funds, including an analysis reflecting the
value of services obtained. In accordance with 20 U.S.C. 31 Subchapter IV § 1234b, any
amount returned must be proportionate to the extent of harm the violation caused to an
identifiable federal interest. A detailed discussion of program-specific barriers can be found
in the FY 2012 Report on the Department of Education’s Payment Recapture Audits.

Accountable Official’s Report on High-Priority Programs

OMB issued an overhauled version of Appendix C to Circular A-123 on October 20, 2014.
Included among the changes is the elimination of a separate report on high-priority
programs as mandated by Executive Order 13520, Reducing Improper Payments
(November 30, 2009), and previous OMB Appendix C guidance. To eliminate duplicate
reporting, the new version of Appendix C to Circular A-123 states that agencies should
include the accountable official’s report on high-priority programs in their AFRs or PARs
beginning with FY 2014 reporting.




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An agency’s accountable official’s report is required to include:

(i) the agency’s methodology for identifying and measuring improper payments by the
agency's high-priority programs;

(ii) the agency’s plans, together with supporting analysis, for meeting the reduction targets
for improper payments in the agency’s high-priority programs; and

(iii) the agency’s plan, together with supporting analysis, for ensuring that initiatives
undertaken pursuant to this order do not unduly burden program access and participation
by eligible beneficiaries.

In FY 2010, OMB designated the Pell Grant Program a high-priority program because
estimated FY 2010 Pell improper payments of $1,005 million exceeded the OMB FY 2010
high-priority program threshold of $750 million. Since then, the Department has worked with
OMB to implement all applicable high-priority program requirements. In order to avoid
duplicate reporting on the Department’s high-priority programs, certain requirements
already reported in preceding sections of this AFR will be referenced in this section instead.

Estimation Methodology and Reduction Targets. Please see the Improper Payment
Estimate Methodologies section for additional information on the new alternative estimation
methodology, this year’s estimate, and reduction targets for the Pell Grant Program. This
alternative methodology, which leverages FSA Program Reviews, is described on the
Department’s improper payment website.

Root Causes and Internal Controls. Root causes and internal controls for improper
payments in the Pell Grant Program are discussed in the previous sections of this AFR.
Additional controls for the Pell Grant Program are presented in this section.

Front-end System Edits. The Department continues to take steps to implement or improve
preventative controls, such as front-end edits in eligibility and payment systems. Recent
examples include the following.

As reported in the FY 2012 Accountable Official’s Report, the Department implemented two
new controls related to the Pell Grant Program (Pell Grant Lifetime Eligibility Used (LEU)
and Unusual Enrollment History (UEH)).

     Pell LEU. The Consolidated Appropriations Act of 2012, Public Law 112-74, amended
      the Higher Education Act (HEA) of 1965, as amended, section 401(c)(5), to reduce the
      duration of a student’s eligibility to receive a Federal Pell Grant from 18 semesters (or
      its equivalent) to 12 semesters (or its equivalent). This provision applies to all Federal
      Pell Grant eligible students effective with the 2012–13 award year. The calculation of
      the duration of a student’s eligibility will include all years of the student’s receipt of
      Federal Pell Grant funding. This change in the duration of students’ Federal Pell Grant
      eligibility is not limited only to students who received their first Federal Pell Grant on or
      after the 2008–09 award year, as the HEA previously provided when the duration of
      eligibility was 18 semesters. Beginning with the 2013–14 award year, Pell Grant LEU
      percentages are provided by National Student Loan Data System (NSLDS) and are
      included along with the Pell Lifetime Limit Flag values on the Institutional Student
      Information Record (ISIR).



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    Pell UEH Flag. The UEH Flag serves the purpose of indicating whether the student has
     an unusual enrollment history with regard to the receipt of Federal Pell Grant funds.
     When a student’s records indicate that the student’s enrollment history falls significantly
     outside the norm, the student’s records must be reviewed by the institution. Based upon
     academic transcripts it may already possess, or by obtaining academic transcripts or
     grade reports, the institution must determine, for each of the previously attended
     institutions, whether academic credit was earned during the relevant award year.
     Academic credit is considered to have been earned if the academic transcript shows
     that the student completed any number of credits or clock hours.

     If the institution makes a determination of continued eligibility, the financial aid
     administrator may choose to require the student to establish an academic plan, similar
     to the type of plan used to resolve satisfactory academic progress appeals. It may also
     be necessary to counsel the student about the Pell Grant duration of eligibility
     provisions—and the impact of the student’s attendance pattern on the future Pell Grant
     eligibility. It is also recommended that the student be counseled on the impact of loan
     eligibility under the new 150 percent subsidized loan limitation.

     If a student who did not earn academic credit at the relevant institutions does not
     provide, to the financial aid administrator’s satisfaction, an explanation and
     documentation for each of those failures, the institution must deny the student additional
     Title IV, HEA program assistance, not just Pell Grant eligibility.

In FY 2013, a new Central Processing System (CPS) edit was added: the NSLDS Fraud
Loan Flag. Previously, a warning was indicated for situations where a guaranty agency, a
Perkins school, or the Department (e.g., OIG) had determined that a loan was obtained
fraudulently. This new control alerts both the institution and the FAFSA applicant that the
NSLDS indicates that the student has one or more student loans that may have been
obtained fraudulently and is not eligible to receive any federal student aid until this issue is
resolved. In these rare cases, the loan is listed under the perpetrator’s identifiers and thus
he or she cannot get further Title IV federal student aid, including a Pell Grant.

In addition, in FY 2014, two new IRS Display Flags were added to CPS and included in
FAFSA reports sent to schools and students: the Student IRS Display Flag and the Parent
IRS Display Flag. The new IRS Display Flags inform schools whether the IRS DRT was
displayed to the student or parent, and, if not, the reason the IRS DRT was not displayed.
The IRS Display Flags are used in addition to the Student IRS Request Flag and Parent
IRS Request Flag, which describe the student or parent’s use of the IRS DRT. The IRS
Request Flags inform schools whether tax information was requested from the IRS and
whether the student or parent changed the requested data after it was transferred. These
flags aid schools in their verification requests to students.

IRS Data Retrieval Tool. The IRS DRT is a joint effort by the Department and the IRS
which enables Title IV student aid applicants and, as needed, parents of applicants to
transfer certain tax information from an IRS website directly to their online FAFSA. For the
2014–15 FAFSA processing cycle, 5.6 million students and parents have transferred their
tax data from the IRS to the FAFSA using the IRS DRT. This usage represents
approximately 31.7 percent of the 17.7 million FAFSAs submitted for the 2014–15
academic year between January 1, 2014, and September 28, 2014. Recent functionality
changes to the IRS DRT include redesigned filtering questions to require yes or no
responses instead of check-the-box responses and improved instructions for using the IRS


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DRT, including enhanced help text to aid users in determining who might be able to use the
tool and how it should be used.

FSA will continue to explore ways to facilitate the detection of error, based on the results of
the FAFSA/IRS Data Statistical Study. Additionally, FSA continues to simplify the
application process by using web-based “smart logic” and promoting the real-time use of
the IRS DRT. For example, compared to the 2009–10 FAFSA processing cycle, the
estimated time to complete the FAFSA application online has decreased from
approximately 60 minutes to less than 30 minutes. These enhancements, coupled with
improved error detection, should allow FSA to further reduce improper payments.

High-priority programs are required to develop a supplemental measure (or measures) to
help gauge progress in reduction efforts and to augment the annual measure. In
coordination with OMB, the Department developed a supplemental measure around IRS
DRT usage. The most current supplemental measure for the Pell Grant Program is the total
number of Pell-eligible applicants who transferred tax data from the IRS as a percent of the
total number of Pell-eligible applicants who were determined to be eligible to use the IRS
DRT to transfer tax data. As of September 28, 2014, this measure is estimated at
66.5 percent for the 2014–15 FAFSA processing year. Upon OMB approval, the
Department will begin to post IRS DRT usage status using this measure to
PaymentAccuracy.gov.

School Verification. FSA continues to utilize the verification process as a key action in
addressing the inaccuracies on the FAFSA by enhancing verification regulations which are
published in the Federal Register annually. Verification is the process required by the
Department that schools conduct to confirm specific information reported on the FAFSA by
the applicant. The Department requires schools to have written verification policies and
procedures to include deadlines for students to submit documentation and consequences of
not meeting the deadlines; method of notifying students of award changes due to
verification; correction procedures; and procedures for referring overpayment cases to the
Department. Schools are required to give each applicant selected for verification a written
statement explaining the student’s responsibilities and the school’s method of notification
during the process.

The Department continues to refine the verification process and to conduct statistical
analysis to establish the most effective and efficient criteria for selecting applicants with the
highest probability of error on their FAFSA submissions for verification. Changes to the
verification process for the 2014–15 award year included adding other untaxed income to
the FAFSA items selected for verification, adding identity verification result functionality to
financial aid administrator access and making adjustments to the verification tracking
groups as discussed below.

As with 2014–15 award year verification, the Department will continue to use data-based
statistical analysis to select applicants for verification. A Verification Tracking Flag will be
set on the applicant’s Institutional Student Information Record (ISIR) to indicate placement
into one of the 2015–16 Verification Tracking Groups. An applicant will remain in the
original 2015–16 Verification Tracking Group for the entire 2015–16 award year regardless
of subsequent corrections to the applicant’s record. Although 2015–16 applicants will not be
assigned to Verification Tracking Group V2 (formerly Supplemental Nutrition Assistance
Program (SNAP) Verification Group), SNAP must be verified for applicants placed in



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Verification Tracking Groups V1, V4, V5, and V6, if the receipt of SNAP is indicated on the
ISIR. The individual verification items from the 2015–16 Federal Register notice that an
applicant must verify are based upon the Verification Tracking Group to which the applicant
is assigned. The complete chart of the 2015–16 Verification Tracking Groups is found in the
Department’s Dear Colleague Letter, GEN-14-11, issued on June 30, 2014.

Annually, the Department analyzes grant recipients and the verification selection system,
and informs the financial aid community of what FAFSA items are subject to verification for
the upcoming award year. This annual analysis is performed to enhance verification
methodology and to meet the goal of selecting the applicants who are most likely to have
incorrect information on their FAFSA.

The anticipated costs to the Department related to improving the IRS DRT so that more
FAFSA applicants use the tool is, in relation to projected savings and simplicity, marginal.
More significant, but not able to be estimated, are the increased costs to the schools and
colleges that must perform verification. However, to the extent that applicants use the IRS
DRT, schools’ verification efforts are reduced.

Measures to Ensure Program Access. FSA is committed to ensuring program access
and providing federal student aid, such as the Pell Grant, to all eligible students pursuing
postsecondary education. The IRS DRT supports access to aid programs through the
financial aid application process by allowing students to transfer tax data directly from the
IRS to the online FAFSA and lessens the burden of income verification. Thus, FSA
continuously promotes use of the IRS DRT. In addition, FSA recognizes the importance of
an application process that can accurately determine eligibility without causing undue
burden on students and their families. For example, while we recognize an increased and
well adopted move towards online FAFSA completion, we continue to offer additional
application methods to individuals to ensure that applicants can take advantage of an
application option that best suits their personal needs. Furthermore, improvements in the
last few years to the FAFSA and IRS DRT have resulted in a decrease in the average time
it takes a student to complete the online FAFSA.

On February 4, 2013, FSA’s Customer Experience group announced a new partnership
alliance between FSA and the IRS. This partnership is a result of ongoing IRS DRT
agreement between the two organizations. The new partnership will focus on reaching
more individuals in low- to moderate-income communities with the goal of providing them
with information, assistance, and access to relevant IRS and FSA services. The partnership
is expected to contribute to increased awareness of FSA programs, such as the Pell Grant
Program, and create opportunities for increased access to the FAFSA, which determines
student aid eligibility.

In addition, as indicated in Dear Colleague Letter GEN-13-16 issued on June 13, 2013, and
referred to in GEN-14-05, the Department encouraged all FAFSA applicants to use IRS
DRT to transfer official IRS tax return information into their FAFSA application, either when
initially completing the FAFSA or during the corrections process. The Department also
noted in GEN-13-16 that acceptable documentation for verification of IRS tax return
information is generally limited to the IRS DRT or an IRS Tax Return Transcript.

Beginning with the 2013 tax year (the 2014–15 FAFSA Processing Year), the IRS has
added a new, more efficient way that tax filers can request and receive Tax Return



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Transcripts. With the new IRS “Get Transcript Online” tool, the tax filer submits an online
transcript request to the IRS and, if the request is authenticated, a second window displays
the transcript in Portable Document Format (PDF). This new IRS tool potentially reduces
the burden on FAFSA applicants who are requested to provide tax transcripts. Overall, both
the Department’s and FSA’s strategic plans support efficient and effective access to student
aid programs such as the Pell Grant Program.

In March 2014, the Department launched a new initiative, the FAFSA Completion Initiative,
through which the Department is partnering with state student grant agencies to allow these
agencies to provide secondary schools, school districts, and certain designated entities with
limited, yet important, information on student progress in completing the FAFSA form.
Because the timely completion of a FAFSA form is an essential step for many families in
obtaining financial aid to pursue a postsecondary education, the FAFSA Completion
Initiative will enable state student grant agencies and their school and district partners to
identify those students who have not filed a FAFSA form and better target counseling, filing
help, and other resources to those students. FAFSA completion is essential for receiving
federal financial aid; therefore, identifying such students can promote college access and
success by ensuring students, particularly low-income students, have access to financial
aid to fund their education.




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                                                             United States Department of Education
                                                                     Schedule of Spending
                                                      For the Years Ended September 30, 2014 and 2013
                                                                                            (Dollars in Millions)


                                                                                                                                 FY 2014                             FY 2013
                                                                                                                                    Non-Budgetary                       Non-Budgetary
                                                                                                                                     Credit Reform                      Credit Reform
                                                                                                                                       Financing                          Financing
                                                                                                                       Budgetary       Accounts             Budgetary     Accounts

Section I: What Money Is Available to Spend?
This section presents resources that were available to spend by the Department.
   Total Resources                                                                                                    $     112,443      $   243,566       $ 102,544              $    257,395
   Amount Available but Not Agreed to be Spent                                                                              (12,125)              (69)        (13,700)                       -
   Amount Not Available to be Spent                                                                                          (2,712)          (10,040)         (2,507)                 (11,315)
Total Amounts Agreed to be Spent                                                                                      $      97,606      $    233,457      $   86,337             $    246,080

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                           $         65     $      144,929                                           $         97          $    141,724
   Credit Program Subsidy Transfers                                                     18,570             39,534                                                  6,405                48,598
   Federal Interest Payments                                                                 3             30,620                                                      -                28,453
   Other Credit Program Payments                                                             3              1,423                                                      3                 1,692
   Federal Student Loan Reserve Fund Valuation                                             194                  -                                                    279                     -
   Grants                                                                               37,223                  -                                                 38,344                     -
   Personnel Compensation and Benefits                                                     270                  -                                                    258                     -
   Contractual Services                                                                  1,205              1,108                                                  1,216                   671
   Other 1/                                                                                 35                  -                                                     40                     -
   Total Program Spending                                                               57,568            217,614                                                 46,642               221,138
Improve Preparation for College and Career from Birth
Through 12th Grade, Especially for Children with High Needs
   Grants                                                                               23,032                  -                                                 24,777                      -
   Personnel Compensation and Benefits                                                      69                  -                                                     72                      -
   Contractual Services                                                                     96                  -                                                    100                      -
   Other 1/                                                                                 12                  -                                                     14                      -
   Total Program Spending                                                               23,209                  -                                                 24,963                      -
Ensure Effective Educational Opportunities for All Students
   Grants                                                                               16,793                  -                                                 16,728                      -
   Personnel Compensation and Benefits                                                     162                  -                                                    160                      -
   Contractual Services                                                                     55                  -                                                     57                      -
   Other 1/                                                                                 23                  -                                                     24                      -
   Total Program Spending                                                               17,033                  -                                                 16,969                      -
Enhance the Education System’s Ability to Continuously Improve
   Grants                                                                                1,519                  -                                                   1,453                     -
   Personnel Compensation and Benefits                                                      91                  -                                                      82                     -
   Contractual Services                                                                    451                  -                                                     433                     -
   Other 1/                                                                                 15                  -                                                      31                     -
   Total Program Spending                                                                2,076                  -                                                   1,999                     -

Total Spending                                                                                                        $       99,886     $   217,614       $       90,573          $    221,138
   Amounts Remaining to be Spent2/                                                                                            (2,280)         15,843               (4,236)               24,942
Total Amounts Agreed to be Spent                                                                                      $       97,606     $   233,457       $       86,337          $    246,080

Section III: Who Did the Money Go To?
This section identifies with whom the Department is spending money based on obligations incurred.
   Non-Federal Obligations                                                       $      97,101                                           $   233,457       $       85,598          $    246,076
   Federal Obligations                                                                     505                                                     -                  739                     4
Total Amounts Agreed to be Spent                                                 $      97,606                                           $   233,457       $       86,337          $    246,080

1/
     Other primarily consists of payments for rent, utilities, communication, land, structures, equipment, travel, and transportation.
2/
  The “Amounts Remaining to be Spent” line is the difference between “Total Spending” and “Total Amounts Agreed to be Spent.” Actual spending in the current FY may include spending
associated with amounts that are agreed to be spent during previous FYs, which may result in negative amounts shown for the “Amounts Remaining to be Spent” line.




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      Summary of Financial Statement Audit and Management
                           Assurances
The following tables provide a summarized report on the Department’s financial statement
audit and its management assurances. For more details, the auditor’s report can be found
beginning on page 102 and the Department’s management assurances on pages 37–47.

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

 Total Material Weaknesses                 0                 0                 0                   0                  0


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

 Total Material Weaknesses                0           0           0                0                   0                  0
The Department had no material weaknesses in the design or operation of the internal control over financial
reporting.
                      Effectiveness of Internal Control over Operations—FMFIA 2
Statement of Assurance: Unqualified*
                                     Beginning                                                                      Ending
 Material Weaknesses                                New      Resolved      Consolidated         Reassessed
                                      Balance                                                                       Balance

 Total Material Weaknesses                0           0           0                0                   0                  0


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

 Total Non-Conformances                   0           0           0                0                   0                  0


                 Compliance with Federal Financial Management Improvement Act (FFMIA)
                                                                  Agency                                Auditor
                                                          No lack of substantial              No lack of substantial
 1.   System Requirements
                                                           compliance noted                    compliance noted
                                                          No lack of substantial              No lack of substantial
 2.   Federal Accounting Standards
                                                           compliance noted                    compliance noted
 3.   United States Standard General Ledger               No lack of substantial              No lack of substantial
      at Transaction Level                                 compliance noted                    compliance noted

*Table uses the term “unmodified” for financial statement audit opinions and “unqualified” for management assurances based
on OMB guidance.




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                                                                                             OTHER INFORMATION
                                                               MEMORANDUM FROM THE OFFICE OF INSPECTOR GENERAL




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      Office of Inspector General’s (OIG) Management and
          Performance Challenges for Fiscal Year 2015
                       Executive Summary
The Office of Inspector General (OIG) works to promote efficiency, effectiveness, and
integrity in the programs and operations of the U.S. Department of Education (Department).
Through our audits, inspections, investigations, and other reviews, we continue to identify
areas of concern within the Department’s programs and operations and recommend actions
the Department should take to address these weaknesses. The Reports Consolidation Act
of 2000 requires the OIG to identify and report annually on the most serious management
challenges the Department faces. The Government Performance and Results
Modernization Act of 2010 requires the Department to include in its agency performance
plan information on its planned actions, including performance goals, indicators, and
milestones, to address these challenges.

Last year we presented five management challenges: improper payments, information
technology security, oversight and monitoring, data quality and reporting, and information
technology system development and implementation. Although the Department made some
progress in addressing these areas, each remains as a management challenge for fiscal
year (FY) 2015.

The FY 2015 management challenges are:

(1) Improper Payments,

(2) Information Technology Security,

(3) Oversight and Monitoring,

(4) Data Quality and Reporting, and

(5) Information Technology System Development and Implementation.

These challenges reflect continuing vulnerabilities and emerging issues faced by the
Department as identified though recent OIG audit, inspection, and investigative work. A
summary of each management challenge area follows. The full FY 2105 Management
Challenges Report is available at
http://www2.ed.gov/about/offices/list/oig/managementchallenges.html.

Management Challenge 1—Improper Payments

Why This Is a Challenge

The Department must be able to ensure that the billions of dollars entrusted to it are
reaching the intended recipients. The Department identified the Federal Pell Grant (Pell),
William D. Ford Federal Direct Loan (Direct Loan), and Federal Family Education Loan
(FFEL) programs as susceptible to significant improper payments.

Our recent work has demonstrated that the Department remains challenged to meet new
requirements and to intensify its efforts to successfully prevent, identify, and recapture


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                                       OFFICE OF INSPECTOR GENERAL’S MANAGEMENT CHALLENGES FOR FY 2015

improper payments. We have identified concerns in numerous areas relating to improper
payments, including calculation of the estimated improper payment rate for the Pell, FFEL,
and Direct Loan programs and improper payments involving grantees and contractors. Our
Semiannual Reports to Congress from April 1, 2011, through March 31, 2014, included
more than $53 million in questioned or unsupported costs from audit reports and over
$47 million in restitution payments from our investigative activity.

Progress in Meeting the Challenge

The Department has revised its estimation methodologies for each of its risk-susceptible
programs (Pell, Direct Loan, and FFEL) and the Office of Management and Budget
approved the new estimation methodologies for all three programs in September 2014.
Although the Office of Management and Budget (OMB) approved the estimation
methodologies, improvements are needed to ensure their completeness.

The Department has identified root causes for improper payments in its risk-susceptible
programs that included documentation, administrative, and verification errors. In response,
the Department planned or completed numerous corrective actions. These actions included
a voluntary data exchange program with the Internal Revenue Service that is intended to
improve the accuracy of financial aid applicant’s income data reported on the online Free
Application for Federal Student Aid (FAFSA); improved verification requirements; enhanced
system edits within the Central Processing System, Common Origination and Support
System, and the National Student Loan Data System; continued use of data analytics; and
various internal controls to prevent and detect errors integrated into its grant and Direct
Loan program-related systems and activities.

What Needs to Be Done

The Department needs to continue to explore additional opportunities for preventing,
identifying, and recapturing improper payments. The Department should continue to work to
develop estimation methodologies that adequately address recommendations made in our
audit work.

Management Challenge 2—Information Technology Security

Why This Is a Challenge

The OIG has identified repeated problems in information technology (IT) security and noted
increasing threats and vulnerabilities to Department systems and data. Department
systems contain or protect an enormous amount of confidential information such as
personal records, financial information, and other personally identifiable information.
Without adequate management, operational, and technical security controls in place, the
Department’s systems and information are vulnerable to attacks. Unauthorized access
could result in losing data confidentiality and integrity, limiting system availability, and
reducing system reliability.

Over the last several years, IT security audits have identified controls that need
improvement to adequately protect the Department’s systems and data. This included
weaknesses in configuration management, identity and access management, incident
response and reporting, risk management, security training, plan of action and milestones,



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OFFICE OF INSPECTOR GENERAL’S MANAGEMENT CHALLENGES FOR FY 2015

remote access management, and contingency planning. In addition, investigative work
performed by the OIG has identified IT security control concerns in areas such as the
Federal Student Aid (FSA) PIN system, mobile IT devices, malware, incident response, and
e-mail spear phishing.

Progress in Meeting the Challenge

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

The Department also stated that it is laying a foundation for increased security oversight
and efficiency with an in-house Cyber Security Operations Center that is scheduled to be
fully operational in the latter part of 2014.

What Needs to Be Done

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

Management Challenge 3—Oversight and Monitoring

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

Oversight and Monitoring—SFA Program Participants

Why This Is a Challenge

The Department must provide effective oversight and monitoring of participants in the SFA
programs under Title IV of the Higher Education Act of 1965, as amended, to ensure that
the programs are not subject to fraud, waste, and abuse. In FY 2014, the Federal
Government planned to provide $161.3 billion in grants, loans, and work-study assistance
to help students pay for postsecondary education. The Department’s FY 2015 budget
request outlines $169.8 billion in Federal student aid, including $29.2 billion in Pell Grants




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and more than $133.7 billion in student loans. Nearly 12.8 million students would be
assisted in paying the cost of their postsecondary education at this level of available aid.

Our audits and inspections, along with work the Government Accountability Office
conducted, continue to identify weaknesses in FSA’s oversight and monitoring of SFA
program participants. In addition, our external audits of individual SFA program participants
frequently identified noncompliance, waste, and abuse of SFA program funds. OIG
investigations have also identified various schemes by SFA program participants to
fraudulently obtain Federal funds.

Progress in Meeting the Challenge

FSA identified numerous initiatives that were completed, in progress, or under
consideration to help ensure that SFA funds are delivered accurately and efficiently. For
example, FSA makes software and updates available to FSA program participants to assist
them in managing Federal funds. FSA also provides training opportunities to financial aid
professionals that are intended to enhance their ability to effectively implement the
Department’s student aid programs. Additionally, FSA reported that it has continued to
develop its risk management processes by enhancing the agency’s analytical capabilities
and strengthening its ability to recognize and mitigate risks in its operational and credit
portfolios.

What Needs to Be Done

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

Oversight and Monitoring—Distance Education

Why This Is a Challenge

Management of distance education programs presents a challenge for the Department and
school officials because of few or no in-person interactions to verify the student’s identity or
attendance. In addition, laws and regulations are generally modeled after the campus-
based classroom environment, which does not always fit delivering education through
distance education. Distance education refers to courses or programs offered through a
technology, such as the Internet, that supports regular and substantive interaction between
postsecondary students and instructors. The flexibility offered is popular with students
pursuing education on a nontraditional schedule. Many institutions offer distance education
programs as a way to increase their enrollment.

Our investigative work has noted an increasing risk of people attempting to fraudulently
obtain Federal student aid through distance education programs. Our audits have identified
noncompliance by distance education program participants that could be reduced through
more effective oversight and monitoring.



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Progress in Meeting the Challenge

The Department has taken or plans to take numerous actions in response to our work in
this challenge area. For example, starting in the January 2013 FAFSA cycle (for the 2013–
2014 award year), applicants selected for verification who are in a distance education
program must provide a notarized copy of a government-issued identification to the school.
For the same FAFSA cycle, the Department began screening applicants for unusual
attendance, such as a pattern of enrolling at several schools, receiving aid, and then
withdrawing. Schools will follow up with these applicants to ensure they are attending
school with an educational purpose, or the Department will not disburse aid. The
Department has also begun tracking applicants who use the same e-mail and IP address
for multiple applications using different names.

What Needs to Be Done

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

The Department should develop regulations that require schools offering distance
education to establish processes to verify the student's identity as part of the enrollment
process. Once these regulations are implemented, the Department should establish
requirements for independent public accountants to assess the effectiveness of schools’
processes for verifying distance education student’s identity. Finally, the Department should
also work with Congress to amend the Higher Education Act to specify that a school’s cost
of attendance budget for a distance education student include only those costs that reflect
actual educational expenses.

Oversight and Monitoring—Grantees

Why This Is a Challenge

Effective monitoring and oversight is essential for ensuring that grantees meet grant
requirements and achieve program goals and objectives. The Department’s early learning,
elementary, and secondary education programs annually serve nearly 16,900 public school
districts and 50 million students attending more than 98,000 public schools and
28,000 private schools. Key programs administered by the Department include Title I of the
Elementary and Secondary Education Act (ESEA), which under the President’s 2015
request would deliver $14.4 billion to help 23 million students in high-poverty schools make
progress toward State academic standards. Another key program is the Individuals with
Disabilities Education Act, Part B Grants to States, which would provide $11.6 billion to help
States and school districts meet the special educational needs of 6.6 million students with
disabilities.

OIG work has identified a number of weaknesses in grantee oversight and monitoring.
These involve local educational agency (LEA) fiscal control issues, State educational




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agency (SEA) control issues, fraud perpetrated by LEA and charter school officials, and
internal control weaknesses in the Department’s oversight processes.

Progress in Meeting the Challenge

The Department has planned or completed numerous corrective actions in response to our
audits. This includes enhancing guidance to applicants and reviewers, updating and
clarifying internal guidance and policy, developing formal monitoring plans, and developing
training to grantees and Department staff. The Department has also developed and
implemented a risk analysis tool that is intended to help identify areas of potential risk in the
Department’s grant portfolio and develop appropriate monitoring, technical assistance, and
oversight plans as a part of grants management. Finally, the Department plans to develop a
working group to consider potential regulations and other measures to address SEA
monitoring issues.

What Needs to Be Done

The Department should continue to improve its monitoring efforts for recipients of formula
and discretionary grant funds. This includes efforts to enhance risk management, increase
financial expertise among its grants monitoring staff, and develop mechanisms to share
information regarding risks and monitoring results. The Department also should consider
adding language to its regulations so that prime recipients are fully cognizant of their
responsibilities related to minimum requirements for monitoring subrecipients. The
Department should include a reporting requirement for fraud and criminal misconduct in
connection with all programs authorized by the Elementary and Secondary Education Act of
1965, as amended, when the Education Department General Administrative Regulations
are revised.

Oversight and Monitoring—Contractors

Why This Is a Challenge

The Department must effectively monitor performance to ensure that it receives the quality
and quantity of products or services for which it is paying. As of May 2014, over $6.6 billion
has been obligated towards the Department’s active contracts. Proper oversight is
necessary to ensure that contractors meet the terms and conditions of each contract; fulfill
agreed-on obligations pertaining to quality, quantity, and level of service; and comply with
all applicable regulations. The Department contracts for many services that are critical to its
operations, such as systems development, operation, and maintenance; loan servicing and
debt collection; technical assistance for grantees; administrative and logistical support; and
education research and program evaluations.

OIG audits have identified issues relating to the lack of effective oversight and monitoring of
contracts and contractor performance. This is primarily related to the appropriateness of
contract payments and the effectiveness of contract management. In addition, OIG
investigations have noted contractor activities, such as false claims, that resulted in
improper billings and payments.




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Progress in Meeting the Challenge

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

What Needs to Be Done

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

Management Challenge 4—Data Quality and Reporting

Why This Is a Challenge

The Department, its grantees, and its subrecipients must have effective controls to ensure
that reported data are accurate and reliable. The Department uses data to make funding
decisions, evaluate program performance, and support a number of management
decisions.

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

Progress in Meeting the Challenge

The Department has completed corrective actions to address issues with implementation of
the GPRA Modernization Act. These include developing internal guidance related to
strategic goals and plans, and the quarterly performance review process, and including
disclosures related to data limitations in all applicable performance reports. The Department
has also reported several planned corrective actions to address deficiencies in internal
controls over assessment results, which include requiring SEAs to respond to all flagged
comments related to assessments and accountability, updating its monitoring plan, and
revising the peer review manual. Additionally, the Department plans to issue Dear
Colleague letters to address identifying and monitoring high-risk schools, timely reporting
and resolving of test irregularities, implementing of test security procedures, and
strengthening of test administration practices.

To address concerns related to one program’s performance data, the Department plans to
provide training to staff on assessing the SEA’s efforts to sufficiently test performance data
and provide reasonable assurance that the data are valid and complete. It also plans to
revise its site visit monitoring instrument to ensure staff sufficiently evaluates SEA
monitoring activities related to the reliability of program performance data.

The Department requires management certifications regarding the accuracy of some SEA-
submitted data. The Department also conducts an ongoing peer review process to evaluate
State assessment systems, and it currently includes a review of test security practices
during its scheduled program monitoring visits. In June 2011, the Secretary sent a letter to



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                                       OFFICE OF INSPECTOR GENERAL’S MANAGEMENT CHALLENGES FOR FY 2015

Chief State School Officers suggesting steps they could take to help ensure the integrity of
the data used to measure student achievement. The Department also has a contract that
runs through 2015 to provide technical assistance to improve the quality and reporting of
outcomes and impact data from Department grant programs.

What Needs to Be Done

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

Management Challenge 5—Information Technology System
Development and Implementation

Why This Is a Challenge

The Department faces an ongoing challenge of efficiently providing services to growing
numbers of program participants and managing additional administrative requirements with
consistent staffing levels. The Department reported that its inflation adjusted administrative
budget is about the same as it was 10 years ago while its full-time equivalent staffing level
has declined by 9 percent. This makes effective information systems development and
implementation, and the greater efficiencies such investments can provide, critical to the
success of its activities and the achievement of its mission.

According to data from the Federal IT Dashboard, the Department’s total IT spending for
FY 2014 was $682.9 million. The Department identified 38 major IT investments,
accounting for $587.9 million of its total IT spending. Our recent work has identified
weaknesses in the Department’s processes to oversee and monitor systems development;
these weaknesses have negatively impacted operations and may have resulted in improper
payments. In its FY 2012 Agency Financial Report, the Department self-reported two
material weaknesses relating to financial reporting of Federal student aid data and
operations of the Direct Loan and FFEL programs that resulted from system functionality
issues occurring after large-scale system conversions in October 2011.

Progress in Meeting the Challenge

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

The Department further reported that actions to correct the root causes of the internal
control deficiencies impacting operation of the Direct Loan and FFEL programs are
ongoing. Actions include researching borrower balances and analyzing root causes of
system limitations to inform recommendations on system and process fixes. In response to
issues surrounding its defaulted loan servicing system, FSA awarded an operations and
maintenance contract to a new vendor.




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OFFICE OF INSPECTOR GENERAL’S MANAGEMENT CHALLENGES FOR FY 2015


What Needs to Be Done

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




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                                                                                   OTHER INFORMATION


                                              Freeze the Footprint
This effort strives to bring a new approach to the workplace at the Department, by building
greater employee performance and productivity through innovative space designs and
technology enhancements, while reducing the agency’s space footprint and associated out-
year costs. The project will also allow the agency to meet the new federal space guidelines
(150–180 usable square footage/person vs. the current usable square footage of 338).

The Department Challenges:

    Limited IT tools to support new mobile workforce
    IT infrastructure is outdated
    In some cases, telework expansion has outpaced space designs
    Agency employee recruitment efforts restricted to a limited number of states, limiting the
     size of the mobile workforce

The Department Strategy:

    Upgrade the IT infrastructure
    Provide mobile workers with 21st century tools
    Strengthen the Performance Management Program
    Promote cultural acceptance of a mobile workforce
    Design innovative work spaces
    Implement an Electronic Records Management System
    Reduce the space footprint

                                   Freeze the Footprint Baseline Comparison
                                                                 2013
                                   FY 2012                                 Change (FY 2012
                                                               (Current
                                   Baseline                                 Baseline–2013)
                                                                Year-1)


                  Square
                                   1,563,641                   1,573,317            (9,676)
                  Footage




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Appendices
APPENDICES




 Appendix A: Selected Department Web Links and Education
                        Resources

College Cost Lists

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

College Navigator

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

College Scorecards

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

One-Stop Shopping for Student Loans

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

College Preparation Checklist

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

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

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

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

College Completion Toolkit

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




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                                                     SELECTED DEPARTMENT W EB LINKS AND EDUCATION RESOURCES


Resources for Adult and Career and Technical Education

The Literacy Information and Communication System (LINCS) is a Department Initiative
that seeks to expand evidence-based practice in the field of adult literacy. LINCS provides
high-quality, on-demand educational opportunities to practitioners of adult education in
order to help adult learners successfully transition to postsecondary education and
employment. LINCS is comprised of three components: 1) the LINCS Resource Collection
provides free online access to high-quality, evidence-based materials and self-access
courses to help practitioners and state and local staff improve programs, services,
instruction and teacher quality; 2) LINCS Regional Professional Development Centers work
with states to offer practitioners training and professional development activities; and 3)
LINCS Community provides an online social learning space (a community of practice) for
networking, information sharing, and collaboration among adult education leadership,
professional developers, administrative staff, and practitioners across the country.
http://lincs.ed.gov/

Program Inventory

The GPRA Modernization Act of 2010, P.L. 111-352, requires that OMB establish a single
website with a central inventory of all federal programs, including the purpose of each
program and its contribution to the mission and goals of the Department. The initial Federal
Program Inventory was published in May 2013. The Department described each program
within 27 budgetary accounts, as well as how the programs support the Department’s
broader Strategic Goals and Objectives.

Since that time, Congress passed the DATA Act requiring new public reporting
requirements, which impact the definition of program used in this guidance. OMB is
currently working with agencies to merge the implementation of the DATA Act and the
Federal Program Inventory requirements to the extent possible to avoid duplicative efforts.
While OMB and agencies determine the right implementation strategy, the initial Federal
Program Inventory remains available on Performance.gov or at
http://www2.ed.gov/programs/inventory.pdf.

Grants Information and Resources

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

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

Federal Registry for Educational Excellence

Federal Registry for Educational Excellence (FREE) provides easily accessible resources in
a wide gamut of subjects for educators. The tool breaks resources into categories ranging
from art and music to science and mathematics. FREE is built on the Learning Registry, an



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APPENDICES
SELECTED DEPARTMENT W EB LINKS AND EDUCATION RESOURCES


open database for sharing educational resources. It also offers a wide variety of primary
documents, photos, and videos. In addition, FREE allows educators to follow via Twitter, a
social network, which facilitates the sharing of ideas. This tool acts as a library of digital
resources for educators to help them enrich their lessons. http://free.ed.gov/

Practice Guides for Educators

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

Performance Data

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

Condition of Education and Digest of Education Statistics

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

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

Projections of Education Statistics to 2021

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

Open Government Initiative

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




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                                                     SELECTED DEPARTMENT W EB LINKS AND EDUCATION RESOURCES


National Assessment of Educational Progress

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

Government Accountability Office

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

Office of Inspector General

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

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




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APPENDICES




       Appendix B: Glossary of Acronyms and Abbreviations
AARTS        Audit Accountability and Resolution Tracking System

ABCP         Asset-Backed Commercial Paper

AFR          Agency Financial Report

APG          Agency Priority Goals

APR          Annual Performance Report

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

CAP Goals Cross-Agency Priority Goals

CAT          Core Assessment Team

CCMS         Continuous Control Monitoring System

CFO          Chief Financial Officer

CHAFL        College Housing and Academic Facilities Loan Program

CPSS         Contract and Purchasing Support System

CSRS         Civil Service Retirement System

DCIA         Debt Collection Improvement Act of 1996

DL           Direct Loan

DMF          Death Master File

DOI          U.S. Department of Interior

DOL          U.S. Department of Labor

DSS          Decision Support System

EAG          Enhanced Assesment Grants

ECASLA       Ensuring Continued Access to Student Loans Act of 2008

EDCAPS       Education Central Automated Processing System

ED-DRB       Education Department’s Disclosure Review Board

EDGAR        Education Department General Administrative Regulations

EFC          Expected Family Contribution

ELC TA       Early Learning Challenge Technical Assistance Center

ERIC         Education Resource Information Center




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                                                                                          APPENDICES
                                                               GLOSSARY OF ACRONYMS AND ABBREVIATIONS


ERR                Entity Risk Reviews

ESEA               Elementary and Secondary Education Act of 1965

FAFSA              Free Application for Federal Student Aid

FAM                Financial Audit Manual

FASAB              Federal Accounting Standards Advisory Board

FCRA               Federal Credit Reform Act of 1990

FECA               Federal Employees’ Compensation Act

FERS               Federal Employees Retirement System

FFB                Federal Financing Bank

FFEL               Federal Family Education Loan

FFMIA              Federal Financial Management Improvement Act of 1996

FISMA              Federal Information Security Management Act of 2002

FMFIA              Federal Managers’ Financial Integrity Act of 1982

FMLoB              Financial Management Line of Business

FMSS               Financial Management Support System

FREE               Federal Registry for Educational Excellence

FSA                Federal Student Aid

FSEOG              Federal Supplemental Educational Opportunity Grant

FY                 Fiscal Year

G5                 Grants Management System

GAAP               Generally Accepted Accounting Principles

GAO                Government Accountability Office

GEPA               General Education Provisions Act

GPA                Grade Point Average

GPRA               Government Performance and Results Act of 1993

GPRAMA             GPRA Modernization Act of 2010

GSA                General Services Administration

HBCUs              Historically Black Colleges and Universities




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APPENDICES
GLOSSARY OF ACRONYMS AND ABBREVIATIONS


HCERA       Health Care and Education Reconciliation Act of 2010

HEA         Higher Education Act of 1965

HEAL        Health Education Assistance Loans

HHS         U.S. Department of Health and Human Services

HR          Hurricane Education Recovery

ICOFR       Internal Control over Financial Reporting

IDEA        Individuals with Disabilities Education Act

IES         Institute of Education Sciences

IHE         Institutes of Higher Education

IPERA       Improper Payments Elimination and Recovery Act of 2010

IPERIA      Improper Payments Elimination and Recovery Improvement Act of 2012

IPIA        Improper Payments Information Act of 2002

IRS         Internal Revenue Service

IRS DRT     IRS Data Retrieval Tool

ISE         Integrated Student Experience

ISIR        Institutional Student Information Record

ISU         Implementation and Support Unit

i3          Investing in Innovation Fund

IT          Information Technology

KEA         Kindergarten Entry Assessment

LEA         Local Educational Agency

LEU         Lifetime Eligibility Used

LVC         Loan Verification Certificates

NIEER       National Institute for Early Education Research

NIST        National Institute of Standards and Technology

NLS         Nortridge Loan System

NSLDS       National Student Loan Data System

OCFO        Office of the Chief Financial Officer




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                                                                                          APPENDICES
                                                               GLOSSARY OF ACRONYMS AND ABBREVIATIONS


OCR                Office for Civil Rights

OCTAE              Office of Career, Technical, and Adult Education

OELA               Office of English Language Acquisition

OESE               Office of Elementary and Secondary Education

OIG                Office of Inspector General

OII                Office of Innovation and Improvement

OMB                Office of Management and Budget

OPE                Office of Postsecondary Education

OPEPD              Office of Planning, Evaluation, and Policy Development

OPM                Office of Personnel Management

OSEP               Office of Special Education Programs

OSERS              Office of Special Education and Rehabilitative Services

PIC                Performance Improvement Council

QPU                Quarterly Performance Update

RELs               Regional Educational Laboratories

RMS                Risk Management Service

RSSI               Required Supplementary Stewardship Information

RTT                Race to the Top

RTTA               Race to the Top-Assessment

RTT-ELC            Race to the Top-Early Learning Challenge

SAFRA              SAFRA Act

SAM                System for Award Management

SAP                Special Allowance Payments

SAT                Senior Assessment Team

SBR                Statement of Budgetary Resources

SEA                State Educational Agency

SFA                Student Financial Assistance

SFFAS              Statement of Federal Financial Accounting Standards




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APPENDICES
GLOSSARY OF ACRONYMS AND ABBREVIATIONS


SIG         School Improvement Grant

SMC         Senior Management Council

SOS         Schedule of Spending

SPFI        Summary of Performance and Financial Information

SSAE        Statements on Standards for Attestation Engagements

SSP         System Security Plan

STEM        Science, Technology, Engineering, and Mathematics

SY          School Year

TEACH       Teacher Education Assistance for College and Higher Education Grant

TIVAS       Title IV Additional Servicers

Treasury    U.S. Department of Treasury

UEH         Unusual Enrollment History

U.S.        United States




160                                              FY 2014 Agency Financial Report—U.S. Department of Education
                                                                                              ACKNOWLEDGMENTS




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

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

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




                       The following companies were contracted to assist in the preparation of the
                            U.S. Department of Education FY 2014 Agency Financial Report:

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


                                           The FY 2014 Agency Financial Report

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

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

                                     U.S. Department of Education, November 2014




FY 2014 Agency Financial Report—U.S. Department of Education                                              161
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