oversight

The U.S. Department of Education FY 2015 Agency Financial Report

Published by the Department of Education, Office of Inspector General on 2015-11-13.

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

Placeholder for Cover
U.S. Department of Education
Arne Duncan
Secretary

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



November 13, 2015
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 2015 Agency Financial Report, Washington D.C., 2015.

This report is available 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. Our Twitter page is at @usedgov, and our blog is at Homeroom.

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 by emailing 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 2015 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 2015, in addition to the Agency Financial Report (AFR), the Department will post to
its website the Annual Performance Report (APR), and the 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 2017
budget.

Please submit your comments and questions regarding this plan and report, and any suggestions to
improve its usefulness to AFRComments@ed.gov or write to:

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




FY 2015 Agency Financial Report—U.S. Department of Education
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                          FY 2015 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)
2015 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, A-123,
Management's Responsibility for Internal Control, and A-136, Financial Reporting
Requirements. The report satisfies the reporting requirements contained in the following
legislation:
    Improper Payments Elimination and Recovery Improvement Act (IPERIA) of 2012
    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
    General Education Provisions Act
    Department of Education Organization Act of 1979
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.

                                               Certificate of Excellence




                        The Department of Education received the Association of
                         Government Accountants’ Certificate of Excellence in
                             Accountability Reporting for its FY 2014 AFR.


FY 2015 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 provided to or distributed by the
Department to support its mission, 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 2016 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 2015 Agency Financial Report—U.S. Department of Education
                                        Message From the Secretary
                                                 November 13, 2015

                                                 In December, I will be stepping down as Secretary of
                                                 Education. Serving in an administration that is committed to
                                                 excellence and equity for all has been the greatest honor of my
                                                 life. The team at the Department is extraordinary, and I owe
                                                 them enormous thanks for their dedication and sacrifice.

                                                 I am pleased to present the Department’s FY 2015 Agency
                                                 Financial Report (AFR). In this report, we share the
                                                 Department’s financial and performance highlights over the
                                                 fiscal year ending September 30, 2015.

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

The Department’s commitment to education has two primary themes that underlie all of our
work: access and equity. Equality of opportunity is a core American value, and every student,
regardless of race, disability, zip code, home language, gender, family income, or other factors,
deserves access to the kind of quality learning that can unleash his/her full potential. Education
cannot fix every barrier in a child’s life, but education has always served as the engine of
opportunity in this country. To that end, we are working to ensure quality teaching in every
classroom; raising standards for all students; building systems to improve instruction; and
significantly improving chronically low-performing schools.

Performance Highlights

In the Department’s FY 2014–18 Strategic Plan, our mission is defined 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
includes a summary of the Department’s performance information and describes how the
Department’s employees are collaborating to support the Department’s mission and helping to
increase access to and equity of education in the nation. The performance data are often self-
reported by states and others; entities reporting the data provide assurances of the data’s
accuracy to the Department. In addition, the Department uses edit checks and program reviews
to assess data reliability.

For those seeking additional details regarding our performance, I invite you to read our Annual
Performance Report (APR), which will be released at the same time as the President’s FY 2017
budget and Congressional Budget Justifications. The APR includes budget allocations for each
strategic goal, in addition to explanation and analysis of progress, challenges and next steps,
and associated metrics for each strategic objective. An appendix listing metrics by goal with
information on data quality, limitations, and improvements is also included in the report. To the
best of my knowledge, the summary performance data included in this AFR are complete and
reliable in accordance with federal requirements.

Financial Management

The Department is the smallest of the cabinet-level agencies in terms of staff, with some
4,100 employees, yet it has the third-largest grant portfolio among the 26 federal grant-making


FY 2015 Agency Financial Report—U.S. Department of Education                                                       iii
MESSAGE FROM THE SECRETARY


organizations. Our balance sheet now exceeds $1.1 trillion in assets, primarily from student
loans. The Department had over $1 trillion in loans outstanding at the end of the year, including
new loans made in FY 2015, as well as the balances of old loans less collections of interest and
principal.

Good stewardship is a management imperative and priority for our Department, and I have been
assured that the financial data included in this AFR are complete and reliable in accordance
with federal requirements. We received our 14th consecutive unmodified or “clean” audit
opinion and no reported material internal control weaknesses. The financial report includes
information and assurances about the Department’s financial management systems and
controls, as well as control and compliance challenges noted by the Department and its
auditors.

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 2016 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 self-
assessments, recipient site visits, and external audits, seriously. The Department implemented
initiatives to respond to the identified challenges and to improve its systems and processes,
including challenges pertaining to grants monitoring, IT systems, and management of student
loan repayments.

Outreach and Partnerships

States and state-level agencies provide most of the education funding in our nation, and as a
result, the Department’s role as a disseminator of information is critical. We are reaching out to
our customers across many platforms, including the ed.gov website; blogs, such as the
Department’s main blog, Homeroom; the Department’s YouTube channel; newsletters; Twitter
(follow us @usedgov); and the Department’s Facebook page.

The Department is working to meet stakeholders face-to-face, through relationships with higher
education communities, national organizations that represent the interests of primary and
secondary education, and civil rights and advocacy organizations. Through e-mail and
stakeholder forums, we and our national partners share updates with state and local affiliates.

Looking Ahead

Guided by our FY 2014–18 Strategic Plan, 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. I am proud of the progress we are making at the Department to
work to provide every student in America with a world-class education.

Sincerely,

/s/


Arne Duncan


iv                                                        FY 2015 Agency Financial Report—U.S. Department of Education
                                                                    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
Looking Ahead and Addressing Challenges ............................................................................................... 24
Financial Highlights ..................................................................................................................................... 25
Limitations of the Financial Statements ...................................................................................................... 38
Analysis of Systems, Controls, and Legal Compliance .............................................................................. 39

Financial Section
Message From the Chief Financial Officer .................................................................................................. 52
About the Financial Section ........................................................................................................................ 54
Financial Statements ................................................................................................................................... 56
Notes to the Financial Statements .............................................................................................................. 60
Required Supplementary Information ......................................................................................................... 99
Required Supplementary Stewardship Information .................................................................................. 101
Report of the Independent Auditors .......................................................................................................... 107

Other Information
About the Other Information Section ......................................................................................................... 124
Improper Payments Reporting Details ...................................................................................................... 125
Combined Schedule of Spending ............................................................................................................. 140
Summary of Financial Statement Audit and Management Assurances ................................................... 142
Memorandum From the Office of Inspector General ................................................................................ 143
Office of Inspector General’s (OIG) Management and Performance Challenges
     for Fiscal Year 2016 Executive Summary .......................................................................................... 144
Freeze the Footprint .................................................................................................................................. 154
Civil Monetary Penalty Adjustment for Inflation ........................................................................................ 155

Appendices
Appendix A: Selected Department Web Links and Education Resources ............................................... 158
Appendix B: FY 2015 List of Applicable Department Financial Statement Laws and Regulations .......... 162
Appendix C: Glossary of Acronyms and Abbreviations ............................................................................ 164




FY 2015 Agency Financial Report—U.S. Department of Education                                                                                                v
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vi                             FY 2015 Agency Financial Report—U.S. Department of Education
–




    Management’s Discussion and Analysis
MANAGEMENT’S DISCUSSION AND ANALYSIS


           About the Management’s Discussion and Analysis
The Department continued to enhance the usefulness of the Agency Financial Report (AFR) as
a summary of the Department’s activities and results in FY 2015 by augmenting this report with
relevant web content. To take advantage of the multiple hyperlinks embedded in the report, we
recommend reading it on the Internet. Our intent is to provide users with access to helpful
information about the Department and its financial and performance activities. This year, we
focused on improving disclosures about our performance management, internal controls, and
legal compliance. To help continue to improve the content of the AFR, readers are encouraged
to provide their feedback at: AFRComments@ed.gov.

This section highlights information on the Department’s performance, financial statements,
systems and controls, compliance with laws and regulations, and actions taken or planned to
address select challenges.

Through its performance, the Department demonstrated its continuing commitment to fortifying
the education system by directing federal resources to, among other things: improving access to
early learning programs, reforming elementary and secondary education to strengthen critical
outcomes, making higher education more accessible and affordable, and working to attract
talented people to the teaching profession. The Department also demonstrated good
stewardship of federal resources by ensuring that its business and financial management
systems and processes are well controlled and managed.

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 link to the full list of Department offices with a description of selected
offices by function.

Discussion of Performance

The Department elected to produce separate financial and performance reports. The Agency
Financial Report for FY 2015 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 FY 2014–15. A detailed discussion of performance information for FY 2015 will be
provided in the Department’s Annual Performance Report (APR) to be released at the same
time as the President’s FY 2017 Budget.

The section includes an overview of performance reporting, a report on the APGs for
FY 2014–15, and a high-level discussion of performance information. The Looking Ahead and
Addressing Challenges section describes the challenges that the Department aims to address
to achieve progress against the FY 2014–2018 Strategic Plan. Finally, the results achieved from
Department expenditures are discussed at a high level in the AFR. For more details about
performance, please 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 2015 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


Financial Highlights

The Department expends a substantial portion of its budgetary resources and cash on multiple
loan and grant 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. Accordingly, the
Department has included more high-level details about sources and uses of the federal funds
received and net costs by program.

Analysis of Systems, Controls, and Legal Compliance

The Department’s internal control framework and its assessment of controls in accordance with
Office of Management and Budget (OMB) Circular A-123, Management’s Responsibility for
Internal Control, provide assurance to Department leadership and external stakeholders that
financial data produced by the Department’s business and financial processes and systems are
complete, accurate, and reliable.

Because the Department produces an Agency Financial Report, detailed performance reporting
is included in the Annual Performance Report, as specified in OMB Circular No. A-11, Part 6,
Section 260. A high-level summary of performance is included in the AFR to provide context for
reporting of financial data and assessment of controls.




FY 2015 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 in 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 effective teachers, principals, and district leaders; establish
challenging content and achievement standards; ensure equity and access for all students to
achieve according to high expectations; and monitor students’ progress against those
standards.

The Department’s largest asset is the portfolio of student loans (see the Financial Highlights and
Notes sections). Grants to states are the second-largest item, mostly for elementary and
secondary education, awarded based on statutory formulas (see the chart on the following
page). The third biggest item is student aid to help pay for college through Pell Grants, Work
Study, and other campus-based programs (see the Notes section). The Department also carries
out competitive grant programs to promote innovation, supports research, collects education
statistics, and enforces civil rights statutes (see the Performance section).

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 civil
rights enforcement offices in federal regions, civil rights 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 are available on the Department’s website.




4                                                          FY 2015 Agency Financial Report—U.S. Department of Education
                                                                           MANAGEMENT’S DISCUSSION AND ANALYSIS


      FY 2014 Actual Formula Grant Distribution by Region and State




    The figures in these tables are made up of funding, from multiple programs, allocated to
    states based on statutory formulas. These do not include discretionary grants, need-based
    grants, or federal loans. For more details, view the Department’s State Budget Tables.

       West           Grades K-12       Postsec      All Other           Midwest   Grades K-12       Postsec      All Other
 Alaska                        253             46            12   Illinois               1,458           1,367           132
 Arizona                       820          1,464            77   Indiana                  653             837            71
 California                  3,953          4,117           394   Iowa                     269             451            33
 Colorado                      431            519            48   Kansas                   322             274            25
 Hawaii                        170             84            16   Michigan               1,171           1,024           107
 Idaho                         162            179            20   Minnesota                456             592            59
 Montana                       163             78            16   Missouri                 612             632            73
 Nevada                        244            159            24   Nebraska                 204             159            23
 New Mexico                    344            223            27   North Dakota             117              51            12
 Oregon                        368            419            56   Ohio                   1,256           1,015           128
 Utah                          269            409            43   South Dakota             158             110            12
 Washington                    622            495            65   Wisconsin                549             464            71
 Wyoming                       107             40            11            TOTAL      $7,225m         $6,976m         $746m
            TOTAL         $7,906m        $8,232m         $809m
                                                                       Northeast      Grades K-12       Postsec        All Other
       South          Grades K-12      Postsec      All Other     Connecticut                  319            308              32
 Alabama                       517          554             70    Maine                        145            127              20
 Arkansas                      350          294             54    Massachusetts                623            564              64
 Delaware                      111           69             16    New Hampshire                126            133              14
 Dist. of Columbia              91          154             20    New Jersey                   842            656              76
 Florida                     1,806        2,099            214    New York                   2,396          2,083             188
 Georgia                     1,080        1,086             81    Pennsylvania               1,239          1,007             143
 Kentucky                      499          435             57    Rhode Island                 128            127              17
 Louisiana                     626          404             46    Vermont                       91             55              18
 Maryland                      506          448             58             TOTAL          $5,909m        $5,060m           $572m
 Mississippi                   398          335             51    Other                      Grades K-12     Postsec      All Other
 North Carolina                956          887            124    American Samoa                      24              6           1
 Oklahoma                      450          337             51    Freely Associated States             7             18           1
 South Carolina                492          431             66    Guam                                42             17           3
 Tennessee                     644          588             84    Indian Set Aside                   236            n/a          37
 Texas                       3,106        2,301            298    Northern Mariana Islands            17              5           1
 Virginia                      682          746             86    Puerto Rico                        704            800          80
 West Virginia                 217          254             41    US Virgin Islands                   28              6           3
            TOTAL        $12,531m     $11,422m        $1,417m     All Other                          368            n/a          50
                                                                                    TOTAL       $1,426m          $852m       $176m
 NOTE: Data is current as of October 21, 2015.




FY 2015 Agency Financial Report—U.S. Department of Education                                                                          5
MANAGEMENT’S DISCUSSION AND ANALYSIS



                        Our Organization in Fiscal Year 2015
    This chart reflects the organizational structure of the U.S. Department of Education.
    Interactive and text versions of the coordinating structure of the Department are available.




6                                                           FY 2015 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 (GPRAMA), the Department’s
framework for performance management starts with the Strategic Plan, including the six
FY 2014–15 APGs, 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. The Department monitors progress toward its strategic
goals and its APGs using data-driven review and analysis. This focus promotes active
management engagement across the Department. Additional information on performance
management is available in the Annual Performance Plans and Annual Performance Reports.

Based on data available as of quarter 3 of FY 2015, 14 metrics in the FY 2014–18 Strategic
Plan showed progress toward the established goals.

The FY 2014–18 Strategic Plan is comprised of six strategic goals and six APGs for
FY 2014–15 and aims to align the administration’s annual budget requests with the
Department’s legislative agenda, supported by the considerable experience and resources
available from its internal staff. The Department welcomes input from Congress, state and local
partners, and other education stakeholders about the Strategic Plan. During FY 2015, the
Department reached out to Congress by following up with the chairs and ranking members of
authorizing, appropriations, and oversight committees requesting consultation and feedback on
its proposed FY 2016–17 APGs, as required by OMB Circular A-11 and the GPRAMA.
Questions or comments about the APGs or the Strategic Plan should be emailed to
APP_APRComments@ed.gov.




FY 2015 Agency Financial Report—U.S. Department of Education                                      7
MANAGEMENT’S DISCUSSION AND ANALYSIS


FY 2014–18 Strategic Plan




8                                      FY 2015 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS




FY 2015 Agency Financial Report—U.S. Department of Education                                      9
MANAGEMENT’S DISCUSSION AND ANALYSIS


U.S. Department of Education Management and Communications
Priority Themes

The mission of the Department is to promote student achievement and preparation for global
competitiveness by fostering educational excellence and ensuring equal access. To fulfill this
mission, the Department’s Strategic Plan revolves around the following themes:

    Early Learning;
    K–12 Education Reform;
    Access, Affordability, and Completion of Postsecondary Education, Career and Technical
     Education, and Adult Education; and
    Equity.

The following examples highlight the Department’s focus for 2015.

Early Learning

This year the Department published A Matter of Equity: Preschool in America, a report on the
status of preschool in the United States and recent progress to expand preschool for low-
income children throughout the states. The Department recognizes that without a focus on
children’s preschool experiences, the country runs the risk of limiting opportunity for an entire
generation of children by having education gaps between low-income and other children before
they enter kindergarten. Recently, the federal government has increased its investment in
providing high-quality early education. The Department’s involvement in this investment has
included the following.

Race to the Top - Early Learning Challenge (RTT-ELC) Grant Program: This program is
jointly administered by the Department and the Department of Health and Human Services. It
provides 20 states with funding to improve early childhood workforce preparation and training;
strengthen health services and family engagement; link early childhood and K–12 data systems
to learn more about how children’s early learning experiences influence their school success;
and ensure that parents have information about high-quality early learning programs in their
communities.

Preschool Development Grants: This four-year federal and state partnership provides
18 states with funding to expand the number of children enrolled in high-quality preschool
programs in high-need communities. The Department estimates that the programs funded by
these grants will enroll 177,000 additional children, who otherwise would not have had the
opportunity for a high-quality preschool education.

K–12 Education Reform

The Department supported K–12 reform through its grant programs and highlighted the lessons
learned from grant and other programs publicly through blogs and a series of videos.
Additionally, the Department has created a policy initiative through outreach to the education
community.

Elementary and Secondary Education Act (ESEA) Flexibility: Since 2012, the Department
has partnered with state and district leaders to provide relief from some provisions of the No
Child Left Behind Act of 2001 in exchange for taking bold actions to improve student outcomes
and ensure equity for all students. Under current law, schools were given many ways to fail but


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                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


very few opportunities to succeed. The law forced schools and districts into one-size-fits-all
solutions, regardless of the individual needs and circumstances in those communities.

Under ESEA flexibility, states continue to focus resources on comprehensive, rigorous
interventions in their lowest-performing schools to help support the neediest students meet high
expectations alongside their peers. States also have focused on improving teacher and principal
effectiveness across the country with evaluation and support systems that are used for continual
improvement of instruction and provide clear, timely, and useful feedback, including feedback
that identifies needs and guides professional development. These systems also can be used to
recognize and reward highly effective educators, as well as to inform important conversations
about ensuring equitable access to effective educators for students from low-income families
and students of color.

State Plans to Ensure Equitable Access: Equal educational opportunity means ensuring that
all schools have the resources they need to provide meaningful opportunities for all students to
succeed, regardless of geography, family income, or race. Too often, students from low-income
families and students of color are more likely than their peers to attend a school staffed by
inexperienced educators or educators rated as ineffective. These inequities are unacceptable.

Helping all students reach their full potential is, quite simply, the life work of America’s great
teachers and principals. Far too frequently, these educators know the enormous challenges that
students growing up in poverty can face. To help ensure that all students are positioned for
success, all students must have equitable access to a safe and healthy place to learn, high-
quality instructional materials and support, rigorous expectations and coursework, and—most
critically—excellent educators to guide learning.

To help combat existing inequities, in July 2014, the Department announced a comprehensive
Excellent Educators for All Initiative to help states and districts support great educators for all
students, including the students who need them most. Under this initiative, the Department
provided states with technical assistance through the Equitable Access Support Network
(EASN) and required each state to submit a State Plan to Ensure Equitable Access to Excellent
Educators (State Plan) on June 1, 2015. As of September 30, 2015, the Department has
approved 16 State Plans, which include a range of strategies to ensure equitable access to
excellent educators including: supporting, strengthening, and modifying teacher preparation
programs; investing in school leadership; providing financial incentives; and implementing
strategies that are focused on predicting, reducing, and eliminating critical shortages in the
teaching force.

Postsecondary Education, Career and Technical Education, and Adult Education

The Department has made great strides in providing the public with information and
transparency around quality postsecondary education. The Department has made progress in
several arenas, including:

    dealing with the cost of a degree and the debt assumed to get that degree;
    emphasizing outcomes when assessing postsecondary education; and
    helping to drive innovation in the higher education sector.

The Department has supported the President’s America’s College Promise plan that would
enable 9 million students to attend one of 1,300 community colleges tuition free. This program
would make two years of college as universal as high school and would benefit both students
and the nation’s economy. Since 2008, total annual financial aid to students has increased by


FY 2015 Agency Financial Report—U.S. Department of Education                                      11
MANAGEMENT’S DISCUSSION AND ANALYSIS


over $50 billion, all part of a total of about $150 billion in grants and loans each year for
postsecondary education. The Department is working to rein in ineffective providers that have
left students with burdensome debt and limited prospects for a well-paying job. Additionally, the
Department has:

    developed a simpler online Free Application for Federal Student Aid (FAFSA) form and
     announced that it will provide students with earlier and easier access to complete the
     FAFSA;
    strengthened oversight to ensure that career training programs eligible for federal student
     aid dollars do not leave students buried in debt with poor employment outcomes;
    expanded the capabilities of the College Scorecard to include new data on outcomes and
     college value that give consumers better information to help them make the right college
     choices for them; and
    created opportunities to make college debt more manageable through income-driven
     repayment plans that tie payments to income to help struggling borrowers.

The Department believes that the top priority for postsecondary institutions should be to focus
on outcomes so that students can get good jobs with their degrees. The Department has urged
states and private institutions to view higher education as a public good by continuing to invest
in their students without reducing funding for postsecondary education. At the same time, the
Department supports a broad range of efforts to foster innovation that will help to drive down the
cost of attaining a college degree. The Department is also working to identify ways to give
colleges and universities more flexibility in their offerings that move beyond traditional
requirements associated with class time and the location of where instruction takes place and
consider new technologies that can reach more learners and measure growth in student
competencies.

Equity

The Department continues to be true to its mission to promote and support equal access to a
quality education. It has ramped up its civil rights protection efforts in the following ways.

Civil Rights Data Collection (CRDC): The CRDC shows school and state-by-state statistics on
such topics as diversity of school staffing, financing, the degree to which students are college-
and career-ready when they graduate, and rates of disciplinary actions by race and ethnicity.
This information makes the characteristics of a school transparent to the public and allows for
comparisons. Regarding discipline, for example, the data show that African American and
Latino students and students with disabilities tend to be disciplined proportionately more than
their peers. In response to that finding, the Department released Rethink Discipline: Resource
Guide for Superintendent Action to provide suggestions for finding more effective ways of
handling behavior in schools.

Processing of Civil Rights Information and Cases: The Department’s Civil Rights Report,
published in April 2015, outlines accomplishments in this area. For example, the Department:

    Wrote and released 11 comprehensive policy guidance documents in FY 2013–14 to notify
     schools and other recipients of their legal obligations and to help them comply with the law;
    In FY 2013, received 9,950 complaints, initiated 30 compliance reviews and directed
     inquiries, and resolved 10,128 cases overall. In FY 2014, the Department received a record-
     high 9,989 complaints, initiated 38 compliance reviews and directed inquiries, and resolved
     9,407 cases in total;


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    Instituted a new policy of publicizing lists of schools under investigation by the Office for Civil
     Rights (OCR), including a list of colleges subject to pending sexual violence cases, and of
     uploading nearly every resolution agreement and letter reached during FY 2014 and beyond
     onto its website. As a result, schools and the public can now access more than
     500 resolutions on the OCR website, which provide examples of what schools are doing to
     come into compliance with civil rights laws.

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.

The ability of the United States to compete successfully in a global economy continues to
depend, in large part, on increasing rates of completion for postsecondary certificates and
degrees, which provide students with the skills needed to be effective in today’s economy.
Regretfully, the dream of obtaining a postsecondary education is swiftly falling beyond the reach
of many students and their families. As costs for college tuition and other related fees and
expenses continue to soar, family savings and nonfederal aid sources are diminishing as a
percentage of those costs. There is growing concern that the rising costs of obtaining a
postsecondary certificate or degree will continue to greatly outpace availability of funds and
ultimately overwhelm the traditional resource mix that so many rely on remaining intact.
Accordingly, providers of postsecondary education must work with federal, state, and other
stakeholders to help bend this unsustainable cost curve.

While most students are able to repay their loans, many feel burdened by the enormity of their
aggregate debt, especially as they seek to find a well paying job, start a family, buy a home,
launch a business, or save for retirement. To address this problem, the Department continues to
focus on efforts intended to make postsecondary education more affordable and loan
repayments more manageable by implementing initiatives from the President’s Value and
Affordability Agenda. The Department continues to work on numerous activities to safeguard
student borrowers, including new methods to communicate with borrowers regarding the
availability of income-based repayment programs; expanding the Pay as You Earn income-
based repayment plan to cover additional borrowers; working to strengthen and clarify matters
related to the discharge of federal student loans under a variety of circumstances; and
collaborating with Treasury and the Consumer Financial Protection Bureau on a series of
statutory, regulatory, and administrative recommendations. Other examples of the emphasis in
this area can be seen in the President’s proposal for the America’s College Promise program,
supporting subsidized tuition at community colleges; UpSkill America, with numerous corporate
partners making commitments to support frontline workers in developing improved skills,
additional training, and needed certifications; and the recently proposed College Opportunity
and Graduation Bonus Program, which would provide an infusion of $7 billion in mandatory
budget authority to support colleges and universities in enrolling and graduating a significant
number of low- and middle-income students, as well as improving their institutional
performance.




FY 2015 Agency Financial Report—U.S. Department of Education                                          13
MANAGEMENT’S DISCUSSION AND ANALYSIS



                  APG: 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: The President set a goal for the United States to 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 ages 25–34 allows us to assess progress in preparing the next
generation of United States workers and to benchmark for international comparisons.

Progress: Starting from a baseline of 44.0 percent in 2012, the Department projected that the
annual increase of educational attainment among ages 25–34 would grow progressively each
year above the four-year historical average of 0.7 percentage points and established a
performance target of 45.6 percent. This APG has been achieved, as 45.7 percent of adults
ages 25–34 have an associate’s degree or higher, exceeding the performance target (note that
the rate reflects prior-year data, in this case from 2014, but is reported in 2015 when data are
available). Department activities that support this goal include redesigning the College
Scorecard to include additional information that helps students make more informed choices,
promoting institutional innovation to foster college completion, and implementing evidence-
based practices that support student success.

Opportunities and Challenges: Continued success toward achieving this goal will depend
largely on whether and to what extent states and institutions: (a) implement policies and
programs to increase 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. Although
the Department has 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.

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 goal for America’s educational system is clear: every student should graduate from high
school ready for college, career training, or a career. Every student should have meaningful
opportunities from which to choose upon graduation from high school. Over the past few years,
states, districts, and schools have initiated groundbreaking reforms and innovations to try to
meet this goal. According to the 2015 Building a Grad Nation report, the national high school
graduation rate hit a record high of 81.4 percent, and for the third year in a row, the nation


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                                                                        MANAGEMENT’S DISCUSSION AND ANALYSIS


remained on pace to meet the goal of 90 percent on-time graduation by 2020. This sixth annual
update on America’s high school dropout challenge shows that these gains have been made
possible by raising graduation rates for groups of students that have traditionally struggled to
earn a high school diploma. The report also includes a comprehensive look at the student
groups and geographic areas that contribute to this progress and that will be key in meeting the
90 percent goal.

    APG: 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 college- and career-ready standards, coupled with high-quality
formative and summative assessments to measure the extent to which students are mastering
the standards, is the foundation to improving educational outcomes for all students.

Progress: Most states have adopted college- and career-ready standards and are in the
process of developing and testing assessments aligned with those standards. The Race to the
Top - Assessment (RTTA) consortia, which included 29 states, DC, and the U.S. Virgin Islands,
completed the operational administration of their assessments during spring 2015. In
September 2015, the Office of Elementary and Secondary Education (OESE) released revised
criteria, procedures, and guidance for the Department’s peer review of state assessment
systems under Title I of the Elementary and Secondary Education Act (ESEA).

Opportunities and Challenges: A challenge facing the Department over the next two years is
supporting states in their plans to implement these standards and aligned assessments for all
students, including English learners, students with disabilities, economically disadvantaged
students, and low-achieving students. To address this challenge, the Department is developing
and targeting technical assistance activities that aim to increase state capacity to leverage
limited resources and continue to identify promising practices across multiple states. The
Department will also begin conducting peer review of state assessment systems, providing
examples of promising and best practices in the field. Additionally, the Department will build a
library of existing resources to assist state educational agencies in full and effective transition to
college- and career-ready standards, leveraging work that has occurred during Race to the Top
with other partner organizations, such as Achieve, Student Achievement Partners, the National
Parent Teacher Association, and others, and work internally to coordinate the provision of
technical assistance across OESE, the Office of Special Education Programs (OSEP), and
other related offices and programs. The Department also funds a Center on Standards and
Assessments Implementation (part of the ESEA Comprehensive Centers program) to help build
the capacity of state educational agencies to implement college- and career-ready standards.

The Department continues to leverage ESEA flexibility to support full adoption and
implementation of college- and career-ready standards, with high-quality, aligned, valid, and
reliable assessments. Additionally, the OSEP Results Driven Accountability (RDA) framework
and State Systemic Improvement Plan (SSIP) development process help states increase their
focus on college- and career-readiness for students with disabilities and close achievement



FY 2015 Agency Financial Report—U.S. Department of Education                                              15
MANAGEMENT’S DISCUSSION AND ANALYSIS


gaps between students with disabilities and their nondisabled peers. By collaborating across
OSEP, OESE, and other offices on RDA and SSIP, the Department will help states similarly
coordinate across offices in their agencies.

     APG: 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: 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. However, as part of the renewal process, the
Department offered states the flexibility to adjust their timelines. As of June 30, 2015, eight
states have fully implemented teacher and principal evaluation and support systems.1

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’ 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 will
continue to use its ESEA flexibility renewal process to provide support and encourage forward
motion in implementing evaluation and support systems.

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.

The effectiveness of early learning is well documented. Every child should have the opportunity
for a great start in life. According to recent Civil Rights Data Collection data, big opportunity

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


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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. Based on the most recent CRDC data from SY 2011–12, 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 United States
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 its
implementation of grants already in the field and continued close partnership with the
Department of Health and Human Services.

           APG: 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, can be used to
inform professional development to improve the early learning workforce, be included in a
state’s comprehensive early learning assessment system, and improve student achievement
and program effectiveness.

Progress: The Department anticipated exceeding the goal of at least nine states collecting and
being able to report disaggregated data on the status of children at kindergarten entry using a
common measure by September 30, 2015. Five RTT-ELC states implemented KEAs in the
2014–15 school year, and the Department expects 7 additional RTT-ELC states to begin
implementing their KEAs in the 2015–16 school year, bringing the total to 12 states projected to
implement a KEA during the 2015–16 school year.

Opportunities and Challenges: Constructing, testing, and implementing KEAs across every
school in every state will be challenging and will take time. In addition, states will need to ensure
that the KEAs are implemented in a balanced way that does not result in the loss of a significant
amount of instructional time. Additionally, two of the three Enhanced Assessment Grants
grantees that are consortia may experience challenges coordinating across states due to
differences in their policies and procedures. The Department is working with these grantees to
minimize these coordination challenges.

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

Equal opportunity is a core American value that helps form a national identity, solidify
democracy, and strengthen the economy. Far too many students, especially in disadvantaged
groups and communities, lack access to a high-quality education, including strong teaching,



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MANAGEMENT’S DISCUSSION AND ANALYSIS


rigorous coursework, high standards, engaging enrichment activities, safe environments, high-
quality preschools, and affordable higher education. The outcomes of our education system
continue to reflect unacceptable inequities. Schools with many students from low-income
families are more likely to be under-resourced schools.

According to the most recent data from the FY 2012 School District Finance Survey, in
23 states, 6.6 million students from low-income families are at risk when it comes to state and
local education funding. In these states, districts serving the highest percentage of students
from low-income families spend fewer state and local dollars per pupil than the lowest poverty
districts, even though students from low-income families have greater educational needs. Since
2002, the gap between per pupil expenditures in high- and low-poverty school districts has
actually grown wider—from a gap of 10.8 percent to a gap in the 2011–12 school year of
15.6 percent.

All young people in this country must have the chance to learn and achieve. Identifying
opportunity gaps is the first step that schools and districts should take to address educational
inequities. The Civil Rights Data Collection is a powerful tool, because it documents real-world
impact. These data provide important markers and starting points for discussion within the
Department and among education stakeholders.

                     APG: 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: Through Race to the Top (RTT), the School Improvement Grant (SIG) program,
Elementary and Secondary Education Act (ESEA) flexibility, and other federal programs, the
Department is providing significant funding, technical assistance, and accountability intended to
improve the nation’s lowest-achieving schools dramatically by, among other strategies, using
intensive turnaround models and identifying the low-achieving schools that are showing strong
evidence of successfully turning around. The Department is focused on supporting innovation,
not just compliance monitoring, and on spurring growth in achievement, not just absolute
achievement measures.

Increasing the national high school graduation rate and decreasing disparities in the graduation
rate is critical to achieving the President’s goal of once again having the highest proportion of
college graduates in the world. The nation has made significant progress in increasing both high
school graduation rates and degree attainment rates, but gaps between rates for different
student groups continue to persist.

Progress: The Department received and is reviewing State Plans to Ensure Equitable Access
to Excellent Educators. In June 2015, the Department hosted 19 local educational agencies with
high dropout rates among students of color to provide technical assistance and support. The




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Department also began the CRDC collection of data for the 2013–14 school year, which is
including for the first time collection of the number of students absent 15 or more days.

Opportunities and Challenges: One key challenge for this APG is sustaining the reforms
when an individial school’s 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 has provided 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.

Additional challenges include: capacity challenges at state, district, and school level mean some
intervention challenges persist; ensuring alignment between SIG, RTT, ESEA flexibility, and
other programs and initiatives; and lack of data to define success. 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.

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.

The foundation for improving systemic capacity is an infrastructure that supports data-driven
decision-making. Stakeholders must have access to relevant, useful, and timely data; and they
need the skills to better understand and make use of the data. With relevant and actionable data
and the ability to use it, policymakers and educators will be able to appraise how states,
districts, schools, and students are currently performing; measure progress; pinpoint gaps;
improve practice; better address student needs; and make sound decisions. States are
developing systems that will yield valid, reliable data that are essential to achieving these
purposes, but there is much more work to do. The Department will continue ongoing efforts to
develop effective statewide longitudinal data systems, design voluntary common data standards
to increase interoperability, and develop the capacity of institutions and staff to utilize data to
improve teaching and learning.

                            APG: 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: Through its mix of grants, contracts, and internal analytic work, the Department
supports the use of research methods and rigorous study designs that provide evidence that is
as robust as possible and fit for the purpose. This APG tracks whether the Department is
increasing its internal capacity to make competitive grant awards based on the existence of (and
amount of) evidence in support of projects, where appropriate.



FY 2015 Agency Financial Report—U.S. Department of Education                                              19
MANAGEMENT’S DISCUSSION AND ANALYSIS


Progress: The Department surpassed the FY 2014 performance target for increasing the
percentage of select new (noncontinuation) discretionary grant dollars that reward evidence. In
FY 2014, 15.92 percent of the Department’s discretionary dollars was awarded to new projects
with supporting evidence of effectiveness, with five competitions in the Office of Innovation and
Improvement, OESE, and Office of Postsecondary Education using evidence through eligibility
requirements, competitive preference priorities, and selection criteria. The Department
anticipates, based on internal projections and on past performance, that it will again meet its
FY 2015 target.

Opportunities and Challenges: Using evidence to award competitive grants entails a shift in
culture and capacity building across the Department to do it well. Additionally, goal targets are
based on reasonable projections about which competitive grant programs may make new
awards in a given fiscal year, but the actual dollar amount awarded will depend on final
appropriations amounts and other funding decisions and trade-offs. Through the Regional
Educational Laboratories and the What Works Clearinghouse, the Department continues to
develop resources and webinars on evidence-related topics, such as creating high-quality logic
models and designing rigorous evaluations. However, grantees vary in their comfort with and
understanding of evaluation and use of evidence and the Department has limited resources to
support grantees in conducting rigorous evaluations that would produce evidence of
effectiveness.

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

Improving critical infrastructure, systems, and overall capacity continues to be the fundamental
thrust and focus of Goal 6 of the Strategic Plan. Several priorities are essential to ensure that
capacity is measurably increasing and improving. These include transformation of the human
resources function and hiring process; and implementation of telework as a work benefit and
flexibility, along with enhancing wide-scale productivity. A significant management focus is to
increase the extent and quality of employee engagement efforts; promote continuous
improvement in financial management; and hold contractors accountable for their work.

In information technology (IT), priorities include creating new strategies and tools, such as two-
factor authentication and other threat mitigation activities, to decrease the ongoing cybersecurity
threats to the Department’s personnel, programs, contractual partners, and delivery systems.
The Department is modernizing and consolidating its real estate portfolio, in an effort to meet
the President’s mandate to “freeze the footprint,” and plans to make tangible reductions in total
square footage used over the next several years.

                               Management Performance


The Department continues to make notable progress toward transforming its human resources
system and hiring process. Following efforts begun in FY 2014, the Department enhanced
leadership and technical expertise to the human resources team, helping to streamline hiring,
bolster employee and labor relations and human capital policy development, for example.
Human resources also introduced innovative strategies and resources to expand the hiring
pools used by managers, which reduced the time to hire, and allowed the team to focus on
other critical customer issues and capacity concerns.



20                                                        FY 2015 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


The President’s Management Agenda includes both mission-oriented and management-
oriented Cross-Agency Priority Goals (CAP Goals), emphasized in FY 2015, and defined more
fully, below. One of the standing CAP goals that relates to all agencies is on Cybersecurity.
Recent, massive data breaches have occurred in both the private sector and in the federal
government, testing and motivating the Department to place more investment and attention
toward threat mitigation and IT security of its most critical infrastructure and related assets.
These IT security incidents have also required an urgent, governmentwide response to both
prepare for and defend against continuous and pervasive attacks against systems and
agencies. The introduction of several new tools and processes has helped to secure the
Department’s IT security posture and has enabled employees to participate in identifying,
reporting, and repelling known attacks. However, the increased capacity has also alerted the
Department to an even greater volume of attacks than seen before. The Department’s capacity
for defense can be seen in certain key metrics, such as the number of agency IT security
incidents, which continues to show fewer occurrences than targeted and anticipated, and which
the Department managed to about 15 percent less incidents than expected. Increased
investments in and creation of two-factor authentication, eradication of privileged user accounts,
and continued security remediation through improved standard operating procedures and
communication to stakeholders are showing some early signs of effectiveness and possible,
repeatable successes.

In FY 2015, the Department continued making major efforts to bolster its impact in the people
and culture element, with an enterprise-wide campaign to address employee engagement at the
principal office component level, the basic work unit structure. The campaign’s agenda covered
employee engagement planning, including the development of a roadmap of essential and best
practices, as well as engagement of the top-level management in each principal office
component unit. Additionally, the Department met the Office of Personnel Management’s
(OPM’s) newly mandated performance standard, with every senior executive being required to
address employee engagement as a part of the annual performance agreement for the
executives. Final participation rates resulting from the 2015 OPM Federal Employee Viewpoint
Survey show significant gains in this area, with a 73 percent survey response rate—3 percent
above the Department’s target—and over 9 percent more than the 2014 response rate.

Other management elements that are critical to sound management are showing positive trends
and results as well. The Department enhanced and improved its IT services and network
delivery by increasing and moving storage capacity to a more secure and less expensive cloud
based facility. It also made improvements to network speed, mobility solutions to enable
telework, and data security. The Department reduced the cost of managing accounts
receivables by outsourcing the management of most of that portfolio to a federal shared service
provider, significantly reducing the cost per transaction. The Department recently launched a
new initiative to migrate to 100 percent electronic vendor invoicing by FY 2018, which will both
improve customer service and significantly reduce the internal processing costs of invoices. The
Department’s percent of compliance with contractor performance reporting requirements is the
best in government, currently over 98 percent. To put these numbers in greater context, this
performance ranks the Department as one of only four agencies that have compliance rates of
90 percent or more.

The Department’s human resource team is producing much needed policy guidance at a faster
rate than in the previous three years, publishing pivotal guidance, such as those related to the
telework program, alternative work schedules, and the merit promotion plan, a clear result of
improved staff technical and leadership capability. Finally, a major change in management and
culture-impacting effort is underway as the Department implements the OMB directive to reduce



FY 2015 Agency Financial Report—U.S. Department of Education                                     21
MANAGEMENT’S DISCUSSION AND ANALYSIS


significantly its real estate “footprint” and space inventory. While reduction of the overall square
footage is the primary goal, this is a long-term endeavor of many years, and the Department
recognizes that it must manage several other indirect dependencies that can derail the expected
progress. However, the Department has made significant progress toward the first phase of the
modernization of its headquarters building and is completing plans to effect the move of two
regional offices from more expensive leased space to less expensive federally owned space.

These efforts, taken as a whole, are positioning the Department to benefit from and leverage
continuous improvement to increase its overall capacity to deliver on and achieve its Strategic
Plan goals.

Cross-Agency Priority Goals

In accordance with the GPRA Modernization Act of 2010, interim 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)                 Smarter IT Delivery
    Insider Threat and Security Clearance            Strategic Sourcing
     Reform                                           Shared Services
    Job-creating Investment                          Benchmark and Improve Mission-support
    Infrastructure Permitting Modernization           Operations
    STEM Education                                   Open Data
    Service Members and Veterans Mental              Lab-to-Market
     Health                                           People And Culture

Performance.gov is updated quarterly for each CAP Goal. The website includes goal statements
and other information, such as accountable senior leader(s) and contributing agencies.
Quarterly performance updates for the website on progress will be provided by the goal leader
in coordination with the Performance Improvement Council (PIC), the Office of Management
and Budget (OMB), corresponding governmentwide management council, and contributing
agencies. (A-11, Part 6, 220.5)

In addition to the APGs, the Department contributes to the following four CAP Goals.

Cybersecurity Goal Statement: Improve awareness of security practices, vulnerabilities, and
threats to the operating environment by limiting access to only authorized users and
implementing technologies and processes that reduce the risk from malicious activity.

A progress update through FY 2015 Q3 is available on Performance.gov. The update further
clarifies the President’s commitment and sense of urgency in addressing cybersecurity threats,
which are deemed to be significant threats to national security, public safety, and economic
viability, particularly given recent major data breaches, such as that which occurred at OPM. In
response to that incident and other threats of potential breaches, the Department participated in
the White House’s “30-day sprint” to address known vulnerabilities, secure network
infrastructures, and restrict access through improved authentication, among other key
strategies.

The third quarter update shows substantive progress in three critical areas:


22                                                         FY 2015 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


    Information Security Continuous Monitoring (ISCM)—Impactful increase in the number
     of Chief Financial Officers Act of 1990 (CFO Act) agencies that met the Secure
     Configuration Management target;
    Identify, Credentialing and Access Management (ICAM)—Notable increase in the
     percentage of civilian users (privileged and unprivileged) using Personal Identification
     Verification (PIV) cards; and
    Anti-Phishing and Malware Defense—Encouraging increase in the number of CFO Act
     agencies that met the Blended Defense target.

Customer Service Goal Statement: 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.

A progress update through FY 2015 Q3 is available on Performance.gov. The update defines
the goal team and a governance plan and identifies subgoals and major actions to achieve
impact. Milestones have been established for each of the four strategy areas and key indicators
are in development.

Science, Technology, Engineering, and Math (STEM) Education Goal Statement: Improve
STEM Education by implementing the Federal STEM Education 5-Year Strategic Plan,
announced in May 2013, specifically:

    Improve STEM instruction.
    Increase and sustain youth and public engagement in STEM.
    Enhance STEM experience of undergraduate students.
    Better serve groups historically under-represented in STEM fields.
    Design graduate education for tomorrow’s STEM workforce.
    Build new models for leveraging assets and expertise.
    Build and use evidence-based approaches.

A progress update through FY 2015 Q3 is available on Performance.gov. The update highlights
the formulation of a governance plan, and identifies subgoals and major strategies to achieve
impact as well as key indicators for the action plan.

Service Members and Veterans Mental Health Goal Statement: Improve mental health
outcomes for Service Members, Veterans, and their Families.

A progress update through FY 2015 Q3 is available on Performance.gov. The update highlights
governance plan alignment with the President’s Executive Actions, and identifies subgoals and
major actions to achieve impact as well as key indicators and milestones.

Additionally, the Department is a member of the Interagency Taskforce on Military and Veterans
Mental Health.

Real time information on CAP Goals is available at performance.gov.




FY 2015 Agency Financial Report—U.S. Department of Education                                     23
MANAGEMENT’S DISCUSSION AND ANALYSIS


                  Looking Ahead and Addressing Challenges
The U.S. Department of Education’s commitment to equity and access are at the heart of its
strategic planning and reporting across the six goals in the Department’s Strategic Plan. Goals
1, 2, and 3 support access and Goals 1, 2, 3, and 4 support equity. Goals 5 and 6 support all of
the other goals through the collection and use of data and through enhancing the operations
and organizational capacity of the Department. Looking to the future, the Department will
continue to celebrate states and local communities working to increase access and opportunity
from early learning to college.

Graduation Rates

America’s high school graduation rate has reached a record high, dropout rates are down, and
1.1 million more Black and Hispanic students are attending college than in 2008, according to
new National Center for Education Statistics data.

As a nation, America must accelerate that pace of change because today:

    a quarter of high schools with the highest percentage of African-American and Latino
     students do not offer Algebra II, and a third do not offer chemistry;
    about 40 percent of school districts do not offer preschool programs; and
    we have far too many students of color, primarily boys, being suspended and expelled from
     school.

The Department’s work will not be done until it ensures that opportunity is not just a possibility,
but a promise. Going forward, the Department will build on what it has already established:

    state-driven accountability that demands progress for all children;
    access to high-quality early education for 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 access, affordability, and completion of postsecondary education. To support the
tracking and reporting of progress against the goals and objectives, the Department provides
regular progress updates on its APGs on performance.gov. Implementation of the Department’s
Strategic Plan 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.

Accomplishing the Department’s strategic goals will require strong coordination and
collaboration from Department staff working with Congress, partners at the state and local
levels, and other stakeholders. Responding to legislative challenges and acting under fiscal
constraints may impact the Department’s ability to provide the necessary incentives and
resources to increase quality, transparency, and accountability.


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                                                                   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 enhance 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. The
Department’s 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
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 14
consecutive years, the Department has earned an unmodified (or “clean”) audit opinion. The
financial statements and notes for FY 2015 are on pages 56–98 and the Independent Auditors’
Report begins on page 107.

The Department’s internal control framework and its assessment of controls over financial
reporting in accordance with OMB Circular A-123, Management's Responsibility for Internal
Control, provide assurance to Department leadership and external stakeholders that financial
data produced by its financial systems and business processes are complete, accurate, and
reliable. This ensures that not only do the financial statements conform to applicable federal
reporting requirements, but also that the Department has trustworthy financial information for
good decision-making. Additionally, the Department’s complete and accurate financial data
enables it to provide accurate and reliable financial reports and transparency about how the
Department is spending federal funds. Further information on management’s assessment of
internal controls can be found in the Analysis of Systems, Controls, and Legal Compliance
section that begins on page 39.

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, 2015, compared with the end of
fiscal years 2011–14, 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.




FY 2015 Agency Financial Report—U.S. Department of Education                                         25
MANAGEMENT’S DISCUSSION AND ANALYSIS



                                                                     Table of Key Measures
                                                            As of September 2015, 2014, 2013, 2012, and 2011
                                                                                 (Dollars in Millions)

                                                                            % Change
                                                                                                  FY 2015            FY 2014            FY 2013             FY 2012            FY 2011
                                                                           FY 15 / FY 14

                                                                           Consolidated Balance Sheet

  Fund Balance with Treasury                                                  +5.0%           $      103,619 $            98,696 $          108,732 $           121,993 $          114,085
  Credit Program Receivables, Net                                             +10.2%               1,017,733             923,545            826,684             673,488            530,491
  Other                                                                       +4.9%                    1,767               1,685              1,642               1,446              1,966
 Total Assets                                                                 +9.7%                1,123,119           1,023,926            937,058             796,927            646,542
  Debt                                                                        +8.8%                1,051,776             966,671            852,432             715,303            547,108
  Liabilities for Loan Guarantees*                                               -                       -                   -                  -                 1,037             10,025
  Other                                                                       +13.7%                  16,540              14,549             16,783              15,432             20,824
 Total Liabilities                                                            +8.9%                1,068,316             981,220            869,215             731,772            577,957
  Unexpended Appropriations                                                    -5.6%                   62,740             66,447              71,371             72,686              71,729
  Cumulative Results of Operations                                            +66.6%                   (7,937)           (23,741)             (3,528)            (7,531)             (3,144)
 Total Net Position                                                           +28.3%          $        54,803 $           42,706 $            67,843 $           65,155 $            68,585

         * The presentation of the FY 2011 and FY 2012 liability for loan guarantees is in the liability section of the Department’s Balance Sheet; however, the presentation of the same
         FY 2013, FY 2014, and FY 2015 liability is in the credit program receivables, net balance sheet line item, due to its negative value.


                                                                               Statement of Net Cost


  Gross Costs                                                                   -6.4%         $       105,115 $          112,295 $            61,353 $           89,263 $            89,910
  Earned Revenue                                                               +8.8%                  (31,690)           (29,125)            (26,881)           (25,490)            (20,397)
 Total Net Cost of Operations                                                  -11.7%         $        73,425 $           83,170 $            34,472 $           63,773 $            69,513




26                                                                                                             FY 2015 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.




Analysis of Assets

The Department’s assets totaled $1,123.1 billion as of September 30, 2015, an increase of
$99.2 billion, or approximately 9.7 percent, over the FY 2014 balance of $1,023.9 billion. The
vast majority of the increase in assets relates to credit program receivables, net, which
increased to $1,017.7 billion, a 10.2 percent increase over $923.5 billion in FY 2014. 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 $102.0 billion
($46.4 billion was disbursed to consolidate FFEL loans). The Department’s total assets are
composed of Fund Balance with Treasury, credit program receivables, and other assets.




FY 2015 Agency Financial Report—U.S. Department of Education                                         27
MANAGEMENT’S DISCUSSION AND ANALYSIS




       Assets as of September 30, 2015 and 2014
                                                                                             2015                      2014
       (Dollars in Millions)


       Fund Balance with Treasury                                                 $      103,619            $        98,696

       Credit Program Receivables, Net                                                1,017,733                    923,545

       Other Assets*                                                                        1,767                      1,685


       Total Assets                                                               $ 1,123,119               $ 1,023,926


* The other assets amount includes Cash and Other Monetary Assets; accounts receivable; property and equipment, net; and other.




28                                                                         FY 2015 Agency Financial Report—U.S. Department of Education
                                                                                    MANAGEMENT’S DISCUSSION AND ANALYSIS


The chart below displays the composition of the Fund Balance with Treasury as of
September 30, 2015. 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, trust funds, and all other funds.




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




FY 2015 Agency Financial Report—U.S. Department of Education                                                          29
MANAGEMENT’S DISCUSSION AND ANALYSIS


The chart below presents the Department’s credit program receivables, net, for fiscal years
2011–15. 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, net, to grow
significantly, from $530.5 billion in FY 2011 to $1,017.7 billion in FY 2015, a $487.2 billion net
increase.




Analysis of Liabilities

Liabilities of the Department totaled $1,068.3 billion as of September 30, 2015, an increase of
$87.1 billion, or approximately 8.9 percent over the FY 2014 balance of $981.2 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 an $85.1 billion
increase in debt.




30                                                        FY 2015 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS




       Liabilities as of September 30, 2015 and 2014
       (Dollars in Millions)                                             2015            2014

       Accounts Payable                                          $      3,696     $     4,001
       Debt                                                          1,051,776         966,671

       Guaranty Agency Funds Due to Treasury                            1,561            1,471

       Accrued Grant Liability                                          2,377            2,487

       Other Liabilities                                                8,906            6,590

       Total Liabilities                                         $ 1,068,316       $   981,220




FY 2015 Agency Financial Report—U.S. Department of Education                                     31
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 2015, debt increased 8.8 percent from $966.7 billion in
the prior year to $1,051.8 billion. The new financing was used to disburse new loans and make
negative subsidy transfers to Treasury’s General Fund.




Statement of Net Cost

The Consolidated Statement of Net Cost reports the Department’s components of the net costs
of operations for a given fiscal year. Net cost of operations consists of the gross costs incurred
less any exchange (i.e., earned) revenue from activities. Gross costs are composed of the costs
of credit and grant programs, and operating costs. Exchange revenues are primarily interest
earned on credit program loans.




32                                                        FY 2015 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS




Analysis of Direct Loan Program Subsidy Expense

One of the components significantly impacting the Department’s gross costs pertain to the
estimated subsidy expense of the Direct Loan program. The Department’s gross costs can
fluctuate significantly each year as a result of changes in the estimated subsidy expense.
Subsidy expense is an estimate of the cost of providing direct loans, but excludes the
administrative costs of issuing and servicing the loans. The Department estimates subsidy
expense using economic models that project cash flows on a net present value basis.

The Department estimates subsidy expense annually for new loans disbursed in the current
year (subsidy transfers); updates the previous cost estimates for outstanding loans disbursed in
prior years (subsidy re-estimates); and updates previous cost estimates based on changes to
terms of existing loans (subsidy modifications). The following chart shows these three
components of the Direct Loan program subsidy expense for the past 5 years.




FY 2015 Agency Financial Report—U.S. Department of Education                                     33
MANAGEMENT’S DISCUSSION AND ANALYSIS




      Note: Negative amounts represent negative expense; positive amounts represent positive expense.

Factors such as interest rates charged to the borrower, interest rates on Treasury debt, default
rates, fees, and other costs impact the estimated cost calculation and determine whether the
overall subsidy expense is positive or negative. Subsidy transfers have been negative in recent
years, primarily because lending interest rates charged were greater than the historically low
rates at which the Department borrowed from Treasury. In practical terms, a negative subsidy
occurs when the interest and/or fees charged to the borrower are more than sufficient to cover
the interest on Treasury borrowings and the costs of borrower default.

The costs of the Direct Loan program are highly sensitive to changes in actual and forecasted
interest rates. For example, in FY 2015, a 1 percent increase in projected borrower interest
rates would reduce projected Direct Loan subsidy expense by $4.3 billion.

Policy changes to student loan terms and changes in default rates also significantly affect the
Direct Loan program subsidy expense. For example, the Department modified Direct Loans in
FY 2015. The Pay as You Earn (PAYE) loan repayment option available to eligible borrowers
caps monthly payments for many recent graduates at an amount that is affordable based on
their income. PAYE, first announced in October 2011, caps payments for Direct Loans at
10 percent of discretionary income for eligible borrowers. Borrowers formerly ineligible for the
more generous PAYE repayment plan are now eligible for a modified version of PAYE that
changed income-based repayment amounts on qualified loans from 15 percent of discretionary
income to 10 percent. This policy change increased subsidy expense by $9.9 billion to reflect
the lower expected loan repayments.

Analysis of Net Cost by Program

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


34                                                                      FY 2015 Agency Financial Report—U.S. Department of Education
                                                                             MANAGEMENT’S DISCUSSION AND ANALYSIS


Department’s FY 2014–2018 Strategic Plan. As further described in the performance section of
the Management’s Discussion and Analysis, 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.

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 applicable strategic
goals. The Department’s FY 2015 expenditures for grant programs totaled over $78 billion. The
three largest grant programs are Title I, Pell, and the Individuals with Disabilities Education Act
(IDEA) grants. 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 local educational agencies (Title I, ESEA, as amended) and
IDEA grants.

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




FY 2015 Agency Financial Report—U.S. Department of Education                                                             35
MANAGEMENT’S DISCUSSION AND ANALYSIS


The following table presents a breakdown of net cost by program for FY 2015 and FY 2014.




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 during the 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 $54.8 billion for the year ended September 30, 2015. This
reflects a 28.3 percent increase over the net position of $42.7 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 $349.7 billion for the year ended September 30,
2015, decreasing from $356.0 billion, or approximately 1.8 percent from the prior year.
Budgetary resources are comprised of appropriated budgetary resources of $117.2 billion and
nonbudgetary credit reform resources of $232.5 billion. The nonbudgetary credit reform
resources are predominantly borrowing authority for the loan programs.




36                                                         FY 2015 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS




Gross outlays of the Department totaled $303.3 billion for the year ended September 30, 2015,
and consisted of appropriated budgetary resources of $103.8 billion and nonbudgetary credit
program funding of $199.5 billion.




FY 2015 Agency Financial Report—U.S. Department of Education                                     37
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 and uses of funds is shown in the schedule of spending on page 140.
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 Department for FY 2015 and FY 2014, 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.




38                                                        FY 2015 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


             Analysis of Systems, Controls, and Legal Compliance

Introduction

Strong internal control helps an entity run its operations efficiently and effectively, report reliable
information about its operations, and comply with applicable laws and regulations. The Federal
Managers’ Financial Integrity Act of 1982 (FMFIA) requires Federal agencies to establish
internal controls that provide reasonable assurance that agency objectives will be achieved.
OMB Circular A-123, Management’s Responsibility for Internal Control, implements FMFIA and
provides guidance to agency managers on improving the accountability and effectiveness of
programs and operations by establishing, assessing, correcting, and reporting on internal
control. The guidance requires federal agencies to provide reasonable assurance that it has met
the three objectives of internal controls:

    Operations—Effectiveness and efficiency of operations;
    Reporting—Reliability of reporting for internal and external use; and
    Compliance—Compliance with applicable laws and regulations.

This section describes the Department’s internal control framework, an analysis of the
effectiveness of its internal controls, and assurances provided by the Department’s leadership
that internal controls were in place and working as intended during FY 2015 to meet the three
objectives.

Control Framework and Analysis

As indicated in the performance management section above, the Department’s Strategic Plan,
including the six FY 2014–15 APGs and the administration’s CAP Goals, sets the foundation for
determining the Department’s mission goals and objectives. Underpinning the Department’s
internal control framework are its organizational structure, people, processes, policies and
procedures, systems, and data.

Control Framework

The Department’s internal control framework helps to ensure that the Department achieves its
strategic goals and objectives related to delivering education services effectively and efficiently
while complying with all applicable laws and regulations. It also provides reasonable assurance
to Department leadership and external stakeholders that financial data produced by the
Department’s financial systems are complete, accurate, and reliable enough to support the
preparation and fair presentation of financial statements that conform to federal standards,
facilitate sound financial decision-making, and provide transparency about how the Department
spent federal funds and maintains stewardship over its financial resources.

The Department maintains a comprehensive internal control framework and assurance process
as depicted in the following diagram.




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MANAGEMENT’S DISCUSSION AND ANALYSIS


                     Internal Control Framework and Assurance Process




The Office of the Chief Financial Officer (OCFO) manages the assurance process on behalf of
Department leadership. The Department established governance over the process, consisting of
a Senior Management Council (SMC), comprised of senior leaders from across the Department
to provide strategic direction and guidance and a Senior Assessment Team (SAT) and Core
Assessment Team (CAT) to provide greater oversight and monitoring of activities related to
internal control assessments. The SAT and CAT are composed of representatives from OCFO,
the Office of the Chief Information Officer (OCIO), student loan and grant-making program



40                                                    FY 2015 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


offices, Risk Management Service (RMS), and other operational support offices (including the
Office of Management).

The annual assurance process is the primary mechanism by which the Department implements
FMFIA and OMB requirements. It requires the head of each principal office to evaluate their
respective internal controls and to assert, in a letter to the OCFO, that they have reasonable
assurance that the controls are in place and working as intended or to provide a detailed
description of significant deficiencies, material weaknesses, and other matters of
nonconformance. In making the assessment, principal office staffs consider relevant
information, such as office managers’ personal knowledge of operations, external audit results,
internal assessments, and other related material.

The OCFO staff works with the principal offices to help them identify potential control
deficiencies and presents them to the SAT to determine whether they represent significant
deficiencies or material weaknesses. Any principal office that identifies a significant deficiency
or material weakness must prepare a Corrective Action Plan (CAP) to address the issue. These
CAPs, in addition to daily operational oversight and management-initiated evaluations, facilitate
the correction and monitoring of controls. If material weaknesses are identified, they are
reported on the Department’s Statement of Assurance.

Analysis of Controls

Overall, the Department relies on the principal office annual assurances, supported by risk-
based internal control evaluations and testing, to provide reasonable assurance that its internal
controls are well designed and in place and working as intended. During FY 2015, the
Department identified no material control weaknesses related to effective and efficient program
operations and no areas of noncompliance with laws and regulations other than those noted in
the Other Regulatory Requirements section below. Although it reported no material
weaknesses, the Department realizes that it has areas of control that need further
strengthening, such as those identified by the Department’s Office of Inspector General in its
Management and Performance Challenges for Fiscal Year 2016 report.

In accordance with OMB Circular A-123, the Department also conducted an additional
assessment of the effectiveness of the Department’s internal controls over financial reporting
and compliance with key financial management laws and regulations as described below.

Internal Control over Financial Reporting

The Department maintains strong internal controls to identify, document, and assess internal
control over financial reporting, which includes:

     comprehensive process documentation for the Department’s significant business processes
      and subprocesses,
     maintenance of a control catalogue composed of 1,690 key financial and operational
      controls that align to the business processes,2
     technical assistance provided to principal offices to help them understand and assess key
      financial controls,
     a risk-based testing strategy, and

2   Including Federal Student Aid (FSA)


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MANAGEMENT’S DISCUSSION AND ANALYSIS


    a process to develop corrective action plans when control deficiencies are found and to
     track progress against those plans.

During FY 2015, the Department tested 1,181 key financial controls. Although some
weaknesses were detected in the design and effectiveness of controls, the Department
determined that there were no material weaknesses. Corrective actions have been initiated for
the deficiencies that were identified.

Financial Management Systems

The Federal Financial Management Improvement Act of 1996 (FFMIA) requires Department
management to make sure that its financial management consistently provides reliable data that
complies with federal financial management system requirements, applicable federal accounting
standards, and the U.S. Standard General Ledger (USSGL) at the transaction level. Appendix D
to OMB Circular A-123, “Compliance with the Federal Financial Management Improvement Act
of 1996” and OMB Circular A-130, “Management of Federal Information Resources” provide
specific guidance to agency managers when assessing conformance to FFMIA requirements.

The Department’s core financial applications are under the umbrella of the Education Central
Automated Processing System (EDCAPS), serving approximately 4,200 Departmental internal
users in Washington, D.C. and 10 regional offices throughout the United States, and
55,000 external users. EDCAPS is composed of five main linked components:

    Financial Management Support System (FMSS),
    Contracts and Purchasing Support System (CPSS),
    Grants Management System (G5),
    E2 Travel System, and
    Hyperion Budget Planning.

The Department designated the FMSS as a mission-critical system that provides core financial
management services, and its system strategy for FY 2016 will focus on:

    using cross-validation rules to prevent invalid accounting transactions from being processed;
    reducing manual reconciliations currently performed by OCFO;
    streamlining with the internal processes of Federal Student Aid (FSA);
    increasing the use of electronic invoicing (Invoice Processing Platform); and
    improving the Department’s capacity for data-sharing and centralized edits to synchronize
     FMSS and its feeder system.
The Department’s financial management systems are designed to support effective internal
control and to produce accurate, reliable, and timely financial data and information. Based on
self-assessments, system-level general controls tests, and results of external audits, the
Department has concluded that there are no material weaknesses in controls over systems. The
Department has also determined that its financial management systems substantially comply
with FFMIA requirements. However, as noted below, the Department continues to address
issues and improve its controls over systems.




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                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


The Department has a System Security Plan (SSP) for EDCAPS that identifies management,
operation, and technical security controls, based upon reviews of the control environment,
documentation, and interviews with information system personnel. Self-assessments and
external audits continue to identify areas in need of improvement to include access control,
configuration management, security management, and personnel security. The major issues are
identified by the OIG in its Management Challenges report.

The Federal Information Security Management Act (FISMA) requires federal agencies to
develop, document, and implement an agency-wide program to provide security for the
information and information systems that support the operations and assets of the agency and
ensure the confidentiality, integrity, and availability of system-related information.

Both the Department’s Chief Information Officer FY 2015 FMFIA Assurance Letter and FSA’s
FY 2015 FMFIA Assurance Letter reported control deficiencies related to access controls and
configuration management. Also, the Department’s FY 2014 FISMA review identified control
deficiencies in six of eleven reporting metrics related to the following areas: configuration
management, identity and access management, incident response and reporting, risk
management, remote access management, and contingency planning. In addition, 5 of the 11
reporting metrics contained repeat or modified repeat findings from reports issued from 2011
through 2013.

The auditors recommend the Department CISO work with the FSA CISO to:

    1a. Refine and fully implement FSA’s system security program to monitor compliance with
     NIST requirements, in coordination with the Department’s organization-wide information
     security program, at both the agency and system level.
    1b. Implement a process to ensure accountability for individuals responsible for remediating
     the identified control deficiencies in the Department and FSA’s systems, including
     cooperation between the Technology Office and Business Operations.
    1c. Implement a process for holding contractors accountable for remediation of control
     deficiencies in the Department and FSA’s systems.

During FY 2015, the Department executed several major initiatives and programs in response to
noted weaknesses in the FY 2014 FISMA audit conducted by the OIG. These initiatives and
programs included:

    Identity Management: FSA implemented a new student identification system that focused on
     making access management for FSA systems more efficient and secure for students,
     borrowers, and FSA business partners by eliminating the use of social security numbers for
     user identification.
    Incident Response: The Department implemented a new Security Operations Management
     system to support joint management of incident response, as well as overall case
     management and Security Operations Center (SOC) operations.
    Dual Authentication: The Department implemented a solution to provide two-factor
     authentication for accessing email remotely from personally owned desktop or laptop
     computers and personal mobile devices, replacing the username and password
     authentication method.




FY 2015 Agency Financial Report—U.S. Department of Education                                     43
MANAGEMENT’S DISCUSSION AND ANALYSIS


    Continuous Monitoring: The Department completed the implementation of the core
     Continuous Monitoring technologies that focus on hardware and software management,
     asset management, vulnerability management, and configuration management.

Controls over Improper Payments

During FY 2015, the Department’s gross outlays totaled $303 billion, consisting of appropriated
budgetary resources of $103.8 billion and nonbudgetary credit program funding of
$199.5 billion. Accordingly, internal controls designed to prevent, detect, and collect improper
payments are an essential part of the Department’s internal control framework. Key controls
related to improper payments include:

    preaward risk assessments,
    use of independent data sources (such as Internal Revenue Service data retrieval) to
     ensure accurate award amounts,
    automated system controls to detect and prevent payment errors, and
    award and payment monitoring.
As described below, in FY 2015, the Department determined that its Pell Grants and Direct
Loan programs were susceptible to significant improper payments risk. A detailed description of
the Department’s controls over improper payments related to these two programs is presented
in the Other Information section of this report.

Other Regulatory Requirements

Besides the laws and regulations cited above, the Department must also comply with a number
of other laws and regulations. Those with notable financial requirements include the Federal
Credit Reform Act of 1990, the Antideficiency Act, the Improper Payments Information Act of
2002, the Debt Collection Improvement Act of 1996, the Pay and Allowance System for Civilian
Employees, the Federal Civil Penalties Inflation Adjustment Act of 1990, the Prompt Payment
Act, the Government Charge Card Abuse Prevention Act of 2012, and the Single Audit Act of
1984.

Federal Credit Reform Act of 1990

The Federal Credit Reform Act of 1990, 2 U.S.C. § 661, was enacted to provide a more realistic
picture of the cost of U.S. government direct loans and loan guarantees. The purpose of Title V
of the act is 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.

Antideficiency Act

The Antideficiency Act (ADA), 31 U.S.C. § 1341(a)(1)(A), 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 Department
substantially complied with the ADA, properly disbursing about $303 billion in gross outlays.
However, as part of its assessment of compliance with relevant laws and regulations, the



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                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


Department discovered an ADA violation that resulted in an improper expenditure of
approximately $60,000, which covered payment for salaries and benefits of two of Department’s
employees who were carrying out responsibilities and duties for positions requiring Senate
advice and consent in an acting capacity after such employees’ second nominations to the
positions had been returned to the President. This was in violation of an appropriations
provision, Pub. L. 111-8, 123 Stat. 693. Upon learning of the violation, the Department took
immediate steps to correct it and reported the violation as required. Management has
determined that this minor incident does not represent a material dollar amount nor does it
indicate a significant control weakness over budget controls.

Improper Payments Information Act of 2002

The Improper Payments Information Act of 2002 (IPIA), Pub. L. 107-300, 116 Stat. 2350, as
amended by the Improper Payments Elimination and Recovery Act of 2010 (IPERA), Pub. L.
111-204, 124 Stat. 2224, and the Improper Payments Elimination and Recovery Improvement
Act of 2012 (IPERIA), Pub. L. 112-248, 126 Stat. 2390, requires federal agencies to annually
report improper payments in programs susceptible to significant improper payments.

In FY 2015, the Department determined that its Pell Grants and Direct Loan programs were
susceptible to significant improper payments risk.

IPERA requires the OIG to review the Department’s improper payments reporting in its AFR and
accompanying materials, and to determine whether the Department has met six compliance
requirements. The OIG audit for FY 2014 found that the Department was not compliant with
IPERA because the Department reported an improper payments rate for the Direct Loan
program that did not meet the annual reduction target that was published in the FY 2013 AFR.
The complete OIG report is available for review at the OIG website.

A detailed description of the findings and corrective actions related to these two programs is
presented in the “Other Information” section of this report.

Debt Collection Improvement Act of 1996

The Debt Collection Improvement Act of 1996 (DCIA), Pub. L. 104-134, 110 Stat. 1321-358,
was enacted into law as part of the Omnibus Consolidated Rescissions and Appropriations Act
of 1996, Pub. L. 104-134, 110 Stat. 1321. The primary purpose of the DCIA is to increase the
collection of nontax debts owed to the federal government. Additionally, the Digital
Accountability and Transparency Act (DATA Act), Pub. L. 113-101, 128 Stat. 1146, amended
Section 3716(c)(6) of the DCIA to require referral of delinquent debt to the Department of
Treasury’s Offset Program (TOP) within 120 days.

As of September 30, 2015, the Department and FSA were not in compliance with the new
120-day referral requirement in 31 U.S.C. Section 3716(c)(6) because FSA had not yet revised
their loan servicing systems, procedures, and internal processes in response to this ruling. This
area of noncompliance is noted in the independent auditor’s report, exhibit B. The Department
will develop a Corrective Action Plan to address this area of noncompliance. During FY 2016,
FSA anticipates the development of a revised policy for referring eligible delinquent debt to TOP
and to establish detailed actions to address this area of noncompliance. This determination of
noncompliance with the DCIA does not represent a material weakness in the Department’s
internal controls.




FY 2015 Agency Financial Report—U.S. Department of Education                                     45
MANAGEMENT’S DISCUSSION AND ANALYSIS


Pay and Allowance System for Civilian Employees

The Pay and Allowance System for Civilian Employees, 5 U.S.C. § 51, 5 U.S.C. § 53, 5 U.S.C.
§ 54, 5 U.S.C. § 55, 5 U.S.C. § 57, and 5 U.S.C. § 59, requires employees to be paid at the
appropriate rates established by law, including general pay increases, and that employees be
paid at least minimum wage. The Department ensures that pay and allowances for agency
employees are appropriately administered and executed in accordance with laws, regulations,
and agency policies, and that delegations of authorities are in place and further delegated to
program areas responsible for exercising human capital activity as appropriate. More
specifically, the Department has delegated authority to ensure that:

    positions in the agency are appropriately classified and graded under executive and general
     schedule, and (where applicable of Public Law) administratively determined positions;
    salaries and expenses for each authorized position are budgeted to include annual
     adjustments (including within grade or rates), locality pay, health benefits, retirement,
     training, travel, transportation, subsistence expense (as applicable), differentials and
     premium pay (as applicable), bonuses, and hiring flexibilities, as appropriate of current laws;
    funding is available for performance and recognition, including opportunities for quality step
     increases;
    appropriate withholdings of pay (as applicable), payment of accumulated and accrued leave,
     premium pay, advancement and allotment of pay, and settlement of pay (accounts),
     severance and back pay is executed properly on behalf of each compensated employee;
    various policies are in place and that periodic assessments are conducted to evaluate the
     use of applicable policies; and
    the Department meets other compliance and reporting requirements, which may include
     periodic investigations as applicable of governing pay and allowance Titles.

Federal Civil Penalties Inflation Adjustment Act of 1990

The Federal Civil Penalties Inflation Adjustment Act of 1990, Pub. L. 104-410, 104 Stat. 890,
requires Federal agencies to issue regulations adjusting their covered civil monetary penalties
for changes in the cost of living by October 23, 1996, and to make necessary adjustments at
least once every four years thereafter. Accordingly, the Department issued regulations adjusting
its civil monetary penalties in October 2012. A description of the civil monetary penalties levied
by the Department is presented in the “Other Information” section of this report.

Prompt Payment Act

The Prompt Payment Act, 31 U.S.C. § 39, requires federal agencies to make timely payments to
vendors. During FY 2015, the Department successfully paid vendors within the timeframe
stipulated by the Prompt Payment Act about 99.99 percent of the time. Additionally, the
Department is committed to making timely payments to every vendor, especially the small
business community, by making accelerated payments within 15 days of invoice.

Government Charge Card Abuse Prevention Act of 2012

The Government Charge Card Abuse Prevention Act of 2012, Pub. L. 112-194, 126 Stat. 1445,
was enacted to prevent waste, fraud, and abuse of governmentwide charge card programs. It
requires all executive branch agencies to establish and maintain safeguards and internal


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                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


controls for purchase cards, travel cards, integrated cards, and centrally billed accounts. The
Department is committed to operating an efficient, effective purchase card program in
compliance with the act. In FY 2015, the Department’s OIG carried out an extensive review of
the purchase card program and affirmed that the Department was aligned with all applicable
policies and procedures.

Single Audit Act of 1984

The Single Audit Act of 1984, Pub. L. 98-502, 98 Stat. 2327, amended by the Single Audit Act
Amendments of 1996, Pub. L. 104-156, 110 Stat. 1396, and OMB Circular A-133 (“Audits of
State, Local Governments, and Non-Profit Organizations”) provide audit requirements for
ensuring that grant funds to state, local, and tribal governments, colleges, universities and other
nonprofit organizations (nonfederal entities) are expended properly. The Department has
strengthened controls over audit follow-up to ensure more timely resolution, correction, and
closure of audit findings. This reflects a key component of the Department’s risk management
strategy under the Department’s Strategic Plan, Objective 6.2. The Department continues to
show significant improvements in timely audit resolution, and remains focused on working
cooperatively with grant recipients to address the most complex and repeat findings.

Management Assurances

The Secretary of Education’s 2015 Statement of Assurance, which is provided below, is the final
report produced by the Department’s annual assurance process.




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MANAGEMENT’S DISCUSSION AND ANALYSIS


                                STATEMENT OF ASSURANCE
                                    FISCAL YEAR 2015
                                    November 13, 2015


The Department of Education (the Department) management is responsible for meeting the
objectives of the Federal Managers’ Financial Integrity Act of 1982 (FMFIA) by establishing,
maintaining, evaluating, and reporting on the Department’s internal control and financial
systems.

In accordance with Section 2 of FMFIA and Office of Management and Budget (OMB) Circular
A-123, “Management’s Responsibility for Internal Control,” management evaluated the
effectiveness of the Department’s internal controls to support effective and efficient
programmatic operations, reliable financial reporting, and compliance with applicable laws and
regulations.

Section 4 of FMFIA and the Federal Financial Management Improvement Act of 1996 (FFMIA)
require management to ensure the Department’s financial management systems provide
reliable, consistent disclosure of financial data. In accordance with Appendix D of OMB Circular
A-123, management evaluated whether the Department’s financial management systems
substantially complied with FFMIA requirements. The Department also conducted a separate
assessment of the effectiveness of its internal control over financial reporting in accordance with
Appendix A of OMB A-123.

Because of inherent limitations, internal control and financial management systems, no matter
how well designed, cannot provide absolute assurance of achieving the Department’s
objectives. There are also certain challenges, such as those control and compliance issues
noted by the Department’s independent auditor, Office of Inspector General, and otherwise
noted in this report, which require management’s attention to ensure the Department’s full
spectrum of risk is taken into consideration, managed, and treated appropriately. We are
committed to resolving the identified challenges.

Based on the results of the Department’s assessments described above, our system of internal
controls provides Department management with reasonable assurance that the objectives of
sections 2 and 4 of the FMFIA were achieved as of September 30, 2015, including having
controls over financial reporting that were in place and operating effectively.

                                                /s/


                                          Arne Duncan




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                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


Forward Looking Information

The Department continually identifies and assesses trends and other factors relevant to its
internal controls, with an eye toward continuous improvement. In pursuit of this objective, the
Department is focusing on the following key areas in the short term:

    Adoption of U.S. Government Accountability Office’s Standards for Internal Control in the
     Federal Government (known as “The Green Book”) and revisions to OMB Circulars A-11
     and A-123, which promote application of Enterprise Risk Management (ERM) practices.
    Increased emphasis on building more effective and efficient business processes and
     controls, especially around those intended to prevent, detect, and recover improper
     payments.
    Implementing effective but adaptable risk management frameworks for both formula and
     discretionary grants throughout the grants lifecycle.
    Proactively facilitating Uniform Guidance implementation by the Department staff and
     grantees to maximize opportunities for increased effectiveness and managing risks inherent
     to change.




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MANAGEMENT’S DISCUSSION AND ANALYSIS




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50                                                      FY 2015 Agency Financial Report—U.S. Department of Education
Financial Section
FINANCIAL SECTION



               Message From the Chief Financial Officer
I am pleased to present the Department of Education’s
FY 2015 Agency Financial Report (AFR).

We are proud of our excellent track record in financial
management and reporting. We have attained our 14th
consecutive unmodified or “clean” opinion.

The Department has many jobs, but reliable financial
management is one of the most important. We provide support
and services to states, schools, and millions of students and
borrowers. The consistency in our accounting and reporting is
a tribute to the excellent work of our employees and the
systems they have set up to gather and report information. Our
relatively small staff is highly productive in awarding and
managing grants, contracts, and loans. Only 1 percent of our
$200 billion in annual disbursements is for administration.

Our more than $1 trillion dollar student loan portfolio is a huge responsibility. The process
of making loans to needy students and servicing them is our number one financial
challenge, especially when many borrowers with low incomes need assistance in repaying
the loans. The Department has worked hard to provide greater flexibility in repayment
plans. For example, more than 4 million of our 42 million borrowers took advantage of
alternative methods to pay back their loans based on a percentage of their income. The
flexible repayment plans made it easier for borrowers to pay back their loans and maintain
better credit histories.

In 2015, we began to see a drop in defaults that had bumped up during the recession. We
saw a drop in the three-year cohort default rate, from 13.7 percent to 11.8 percent. This
was a good sign, even if some of the improvement related to a better overall employment
picture. We took some other steps to get better. The Department worked with contractors
to improve loan servicing. We expanded efforts to mine data and make it more available
through cooperative efforts with Treasury. We announced regulations to address
weaknesses among institutions offering training intended to lead to gainful employment.
We worked on improving compliance with student aid statutes and regulations by the many
institutions that partner with the Department in administering both our student loans and the
$32 billion in aid to help students and families pay for college through Pell Grants, in
addition to Work Study and other campus-based programs.

To help students find clear, reliable data on critical questions of college affordability and
value, such as whether they are likely to graduate, find middle-class jobs, and pay off their
loans, the Department introduced a revised College Scorecard. The revised Scorecard and
new customized tools will give students, parents, and advisors better access to data that
will be useful in planning for college and getting the most out of their investment and the
taxpayers’ investment in them.

Our second largest financial commitment is over $30 billion in grants to states, most of
which go toward elementary and secondary education and get awarded based on a
legislated formula basis. These include funds for disadvantaged students and teachers
under the Elementary and Secondary Education Act (ESEA) and the Individuals with
Disabilities Education Act (IDEA). The Department also carries out competitive grant



52                                                   FY 2015 Agency Financial Report—U.S. Department of Education
                                                                                      FINANCIAL SECTION
                                                               MESSAGE FROM THE CHIEF FINANCIAL OFFICER

programs to promote innovation, performs research, collects education statistics, and
enforces civil rights statutes.

In addition to providing an unmodified opinion for FY 2015, our auditors reported that there
were no material internal control weaknesses and no material instances of noncompliance
with applicable laws and regulations, except one item involving the Debt Collection
Improvement Act. As such, I am assured that the financial data included in this AFR are
complete and reliable in accordance with federal requirements.

In full disclosure and as noted in the Management Discussion and Analysis, the Department
did not comply with two laws and had a minor Antideficiency Act violation. While these
issues were technical in nature, we strive for perfection in all areas of financial
management. We have begun remedial actions to address these weaknesses.

Due to the dynamic nature of our loan and grant lines of business, we often have
opportunities for continuous improvement. While we believe our overall control framework
is thorough and we have found no material control weaknesses, our independent auditors
and the Office of Inspector General have identified control weaknesses and highlighted
several management challenges. We are addressing these issues as well as challenges in
areas, such as improper payments, grant monitoring, IT systems, and the management of
student loan repayments. We will use auditor recommendations as a guide to further
strengthen our internal controls.

/s/

Thomas P. Skelly
Delegated to perform the functions and duties of the Chief Financial Officer
November 13, 2015




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FINANCIAL SECTION



                          About the Financial Section
In FY 2015, the Department prepared its financial statements as a critical aspect of
ensuring accountability and stewardship for the public resources entrusted to it. Preparation
of these statements is an important part of the Department’s financial management goal of
providing accurate, reliable information that may be used to assess performance and
allocate resources.

The Department’s financial statements and additional information for FY 2015 and FY 2014
include the following. The Department welcomes comments from readers to further improve
the report.

The Consolidated Balance Sheet summarizes the assets, liabilities, and net position by
major category as of the reporting date. Intragovernmental assets and liabilities resulting
from transactions between federal agencies are presented separately from assets and
liabilities from transactions with the public.

The Consolidated Statement of Net Cost shows, by strategic goal, the net cost of
operations for the reporting period. Net cost of operations consists of full program costs
incurred by the Department less exchange revenues earned by those programs.

The Consolidated Statement of Changes in Net Position presents the Department’s
beginning and ending net position by two components – Cumulative Results of Operations
and Unexpended Appropriations. It summarizes the change in net position by major
transaction category. The ending balances of both components of the net position are also
reported on the Consolidated Balance Sheet.

The Combined Statement of Budgetary Resources presents the budgetary resources
available to the Department, the status of these resources, and the outlays of budgetary
resources.

The Notes to the Financial Statements provides information to explain the basis of the
accounting and presentation used to prepare the statements and to explain specific items in
the statements. They also provide information to support how particular accounts have
been valued and computed. A list of each of the notes is presented below.

The Combining Statement of Budgetary Resources as Required Supplementary
Information presents budgetary resources by major program.

The Required Supplementary Stewardship Information (RSSI) provides disclosure of
investments in human capital and the related program outcomes resulting from stewardship
expense outlays.

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



54                                                   FY 2015 Agency Financial Report—U.S. Department of Education
                                                                          FINANCIAL SECTION
                                                                ABOUT THE FINANCIAL SECTION

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
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, 2015 and 2014.

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.

Supplementing state and local government funding, the Department utilizes its annual
appropriations and outlay authority to foster human capital improvements across the nation
by supporting programs along the entire spectrum of “cradle to career” education.
Increased employability makes Americans more competitive in the global labor market,
yielding lower unemployment, higher economic well-being, and greater security for the
nation.

Report of the Independent Auditors

The results of the audit of the Department’s financial statements for FY 2015 and FY 2014
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, 2015 and 2014, and for the years then ended.




FY 2015 Agency Financial Report—U.S. Department of Education                               55
FINANCIAL SECTION
FINANCIAL STATEMENTS



                                 United States Department of Education
                                      Consolidated Balance Sheet
                                         As of September 30, 2015 and 2014
                                                   (Dollars in Millions)



                                                                                     FY 2015                       FY 2014
Assets:
 Intragovernmental:
      Fund Balance with Treasury (Note 3)                                      $           103,619            $           98,696
      Accounts Receivable (Note 4)                                                               2                             3
      Other Intragovernmental Assets (Note 8)                                                   76                            55
  Total Intragovernmental                                                                  103,697                        98,754

     Cash and Other Monetary Assets (Note 5)                                                 1,561                        1,471
     Accounts Receivable, Net (Note 4)                                                         101                          136
     Credit Program Receivables, Net (Note 6)                                            1,017,733                      923,545
     Property and Equipment, Net (Note 7)                                                       21                            7
     Other Assets (Note 8)                                                                       6                           13
Total Assets (Note 2)                                                          $         1,123,119            $       1,023,926


Liabilities:
 Intragovernmental:
      Accounts Payable (Note 9)                                                $                 1            $               1
      Debt (Note 10)                                                                     1,051,776                      966,671
      Guaranty Agency Funds Due to Treasury (Note 5)                                         1,561                        1,471
      Other Intragovernmental Liabilities (Note 11)                                          8,735                        6,413
  Total Intragovernmental                                                                1,062,073                      974,556

     Accounts Payable (Note 9)                                                                3,695                         4,000
     Accrued Grant Liability (Note 12)                                                        2,377                         2,487
     Other Liabilities (Note 11)                                                                171                           177
Total Liabilities (Note 11)                                                    $         1,068,316            $          981,220

     Commitments and Contingencies (Note 19)

Net Position:
     Unexpended Appropriations (Note 13)                                       $             62,740           $           66,447
     Cumulative Results of Operations (Note 13)                                              (7,937)                     (23,741)
Total Net Position (Note 13)                                                   $             54,803           $           42,706

Total Liabilities and Net Position                                             $         1,123,119            $       1,023,926



The accompanying notes are an integral part of these statements.




56                                                                     FY 2015 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, 2015 and 2014
                                                               (Dollars in Millions)




                                                                                           FY 2015            FY 2014
Program Costs:



   Increase College Access, Quality, and Completion
   Gross Costs                                                                         $       63,697     $      69,746
   Earned Revenue                                                                             (31,600)          (29,031)
        Net Program Costs                                                              $       32,097     $      40,715


   Improve Preparation for College and Career from Birth
   Through 12th Grade, Especially for Children with High Needs
   Gross Costs                                                                         $       22,350     $      23,402
   Earned Revenue                                                                                 (20)              (15)
        Net Program Costs                                                              $       22,330     $      23,387


   Ensure Effective Educational Opportunities for All Students
   Gross Costs                                                                         $       16,656     $      17,101
   Earned Revenue                                                                                 (11)              (15)
        Net Program Costs                                                              $       16,645     $      17,086


   Enhance the Education System’s Ability to Continuously Improve
   Gross Costs                                                                         $        2,412     $          2,046
   Earned Revenue                                                                                 (59)                 (64)
        Net Program Costs                                                              $        2,353     $          1,982



Net Cost of Operations (Notes 14 & 17)                                                 $       73,425     $      83,170



The accompanying notes are an integral part of these statements.




FY 2015 Agency Financial Report—U.S. Department of Education                                                    57
  FINANCIAL SECTION
  FINANCIAL STATEMENTS



                              United States Department of Education
                         Consolidated Statement of Changes in Net Position
                             For the Years Ended September 30, 2015 and 2014
                                                   (Dollars in Millions)


                                                                  FY 2015                                      FY 2014
                                                         Cumulative                                   Cumulative
                                                         Results of    Unexpended                     Results of    Unexpended
                                                         Operations Appropriations                    Operations Appropriations


Beginning Balances:
 Beginning Balances                                  $        (23,741)     $        66,447        $        (3,528)     $        71,371

Budgetary Financing Sources:
 Appropriations Received                             $             -       $       100,955        $             -      $        95,293
 Appropriations Transferred – In/Out                               -                  (397)                     -                   76
 Other Adjustments (Rescissions, etc.)                             -                  (783)                     -                 (619)
 Appropriations Used                                         103,482              (103,482)                99,674              (99,674)
 Nonexchange Revenue                                               8                     -                     12                    -
 Donations and Forfeitures of Cash and
 Cash Equivalents                                                     2                    -                     2                    -
Other Financing Sources:
 Imputed Financing from Costs Absorbed by Others                    30     $               -                    36     $              -
 Negative Subsidy Transfers, Downward Subsidy
 Re-Estimates, and Other                                      (14,293)                     -              (36,767)                    -
Total Financing Sources                              $        89,229       $         (3,707)      $        62,957      $         (4,924)


Net Cost of Operations:                              $        (73,425)     $               -      $       (83,170)     $              -


Net Change:                                          $         15,804      $         (3,707)      $       (20,213)     $         (4,924)


Net Position (Note 13)                               $         (7,937)      $       62,740        $       (23,741)     $        66,447




The accompanying notes are an integral part of these statements.




  58                                                                  FY 2015 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, 2015 and 2014
                                                                  (Dollars in Millions)


                                                                                              FY 2015                        FY 2014
                                                                                                         Non-                        Non-
                                                                                                     Budgetary                   Budgetary
                                                                                                    Credit Reform               Credit Reform
                                                                                                      Financing                   Financing
                                                                                 Budgetary            Accounts       Budgetary    Accounts
Budgetary Resources:
  Unobligated Balance, Brought Forward, October 1                              $       14,837 $           10,109     $   16,207     $     11,315
  Recoveries of Prior Year Unpaid Obligations                                           1,978             20,727          1,131           97,274
  Other Changes in Unobligated Balance (+ or -)                                          (681)           (24,526)          (372)         (99,811)
  Unobligated Balance from Prior Year Budget Authority, Net                    $       16,134 $            6,310     $   16,966     $      8,778
  Appropriations (Discretionary and Mandatory)                                        100,701                904         95,004              581
  Borrowing Authority (Discretionary and Mandatory) (Note 16)                               -            171,807              -          182,860
  Spending Authority from Offsetting Collections
  (Discretionary and Mandatory)                                                           383             53,439           473            51,347
Total Budgetary Resources (Note 16)                                            $      117,218       $    232,460     $ 112,443      $    243,566

Status of Budgetary Resources:
  Obligations Incurred (Note 16)                                               $      102,444       $    218,023     $   97,606     $    233,457
  Unobligated Balance, End of Year:
       Apportioned                                                                        11,806             550        12,125                69
       Unapportioned                                                                       2, 968         13,887         2,712            10,040
  Total Unobligated Balance, End of Year                                       $          14,774    $     14,437     $ 14,837       $     10,109
Total Status of Budgetary Resources (Note 16)                                  $      117,218       $    232,460     $ 112,443      $    243,566

Change in Obligated Balance:
Unpaid Obligations
 Unpaid Obligations, Brought Forward, October 1                                $       56,219 $            80,316    $    59,630    $    161,747
 Obligations Incurred                                                                 102,444             218,023         97,606         233,457
 Outlays (Gross) (-)                                                                 (103,847)           (199,496)       (99,886)       (217,614)
 Actual Transfers, Unpaid Obligations (net) (+ or -)                                     (193)                  -              -               -
 Recoveries of Prior Year Unpaid Obligations (-)                                       (1,978)            (20,727)        (1,131)        (97,274)
 Unpaid Obligations, End of Year                                               $       52,645 $            78,116    $    56,219    $     80,316
Uncollected Payments
 Uncollected Payments, Federal Sources, Brought Forward,
 October 1 (-)                                                                 $              (1) $           (26)   $        (3)   $        (25)
 Change in Uncollected Payments, Federal Sources (+ or -)                                     (2)               -              2              (1)
 Uncollected Payments, Federal Sources, End of Year (-)                        $              (3) $           (26)   $        (1)   $        (26)
Memorandum (Non-add) Entries
 Obligated Balance, Start of Year (+ or -)                                     $          56,218    $     80,290     $   59,627     $    161,722
 Obligated Balance, End of Year (+ or -)                                       $          52,642    $     78,090     $   56,218     $     80,290

Budget Authority and Outlays, Net:
 Budget Authority, Gross (Discretionary and Mandatory)                         $      101,084 $           226,150    $   95,477     $    234,788
 Actual Offsetting Collections (Discretionary and Mandatory) (-)                         (713)           (122,387)         (624)         (97,463)
 Change in Uncollected Customer Payments from Federal Sources
 (Discretionary and Mandatory) (+ or -)                                                    (2)                 -              2               (1)
Budget Authority, Net (Discretionary and Mandatory)                            $      100,369 $          103,763     $   94,855     $    137,324
  Outlays, Gross (Discretionary and Mandatory)                                 $      103,847 $           199,496    $    99,886 $       217,614
  Actual Offsetting Collections (Discretionary and Mandatory) (-)                        (713)           (122,387)          (624)        (97,463)
  Outlays, Net (Discretionary and Mandatory)                                          103,134              77,109         99,262         120,151
  Distributed Offsetting Receipts (-) (Note 16)                                       (13,105)                  -        (39,652)              -
 Agency Outlays, Net (Discretionary and Mandatory) (Note 16)                   $        90,029 $           77,109    $    59,610 $       120,151

The accompanying notes are an integral part of these statements.




   FY 2015 Agency Financial Report—U.S. Department of Education                                                                         59
FINANCIAL SECTION




                   Notes to the Financial Statements
          For the Years Ended September 30, 2015 and 2014

Note 1. Summary of Significant Accounting Policies
Reporting Entity and Programs
The U.S. Department of Education (the Department), a cabinet-level agency of the Executive
Branch of the U.S. Government, was established by Congress under the Department of
Education Organization Act (Public Law 96-88), which became effective on May 4, 1980. The
mission of the Department is to promote student achievement and preparation for global
competitiveness by fostering educational excellence and ensuring equal access. The
Department engages in four major types of activities: establishing policies related to federal
educational 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.
The Department is primarily responsible for administering federal student loan and grant
programs and provides technical assistance to loan and grant recipients and other state and
local partners. The significant portion of the financial activities of the Department relate to the
execution of grant and loan programs which are 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 (Direct Loan)
program and the Federal Family Education Loan (FFEL) program.
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 to eligible undergraduate and graduate students and their parents. The
FFEL program, authorized by the HEA, operates through state and private nonprofit guaranty
agencies which provided loan guarantees on loans made by private lenders to eligible
students. The SAFRA Act, which was included in the Health Care and Education Reconciliation
Act of 2010 (HCERA), stated that no new FFEL loans would be made effective July 1, 2010.
The Department also administers loans for the Historically Black Colleges and Universities
(HBCU) Capital Financing program, the Health Education Assistance Loan (HEAL) program,
the Teacher Education Assistance for College and Higher Education Grant (TEACH) program,
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: Federal
Pell Grant (Pell Grant) program to provide need-based grants that provide access to
postsecondary education for low-income undergraduate and certain postbaccalaureate
students; 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 discretionary grants are the Federal TRIO (TRIO) program, 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 (ESEA), as amended; grants
issued under the Individuals with Disabilities Education Act (IDEA); and grants to local
education agencies.

60                                                         FY 2015 Agency Financial Report—U.S. Department of Education
                                                                                 FINANCIAL SECTION
                                                                NOTES TO THE FINANCIAL STATEMENTS


Program Offices
The Department has three major program offices that administer most of its loan and grant
programs.
    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 Office of Elementary and Secondary Education (OESE) assists state and local
     educational agencies to improve the achievement of preschool, elementary, and secondary
     school students, helps ensure equal access to services leading to such improvement—
     particularly children with high needs, and provides financial assistance to local educational
     agencies whose local revenues are affected by federal activities.
    The Office of Special Education and Rehabilitative Services (OSERS) supports programs
     that help provide early intervention and special education services to children and youth
     with disabilities. OSERS also supports programs for the vocational rehabilitation of youth
     and adults with disabilities, including pre-employment transition services and other
     transition services designed to assist students with disabilities to enter postsecondary
     education and achieve employment.
Other offices that administer programs and provide leadership, technical assistance, and
financial support to state and local educational activities and institutions of higher education for
reform, strategic investment, and innovation in education include: 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); and Office of
Innovation and Improvement (OII). In addition, the Office for Civil Rights (OCR) works to ensure
equal access to education, promotes educational excellence throughout the nation, and serves
student populations facing discrimination and the advocates and institutions promoting
systemic solutions to civil rights issues. (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.


FY 2015 Agency Financial Report—U.S. Department of Education                                      61
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

Intradepartmental transactions and balances have been eliminated from the consolidated
financial statements.
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 subsidy
cost of direct loans and loan guarantees at the time the loan is disbursed. 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).
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
subsidy cost to the government (a “positive” subsidy), breakeven (zero subsidy cost), or
estimate a negative subsidy cost. Negative subsidy occurs when the estimated cost of
providing loans to borrowers from Treasury borrowing, collection costs, and loan forgiveness is
less than the value of collections from borrowers for interest and fees, in present value terms.
The subsidy costs 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 is 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 financing, program, and general fund receipt accounts for
loan guarantees committed and direct loans obligated after September 30, 1991.
    Financing accounts borrow funds from Treasury, make direct loan disbursements, collect
     fees from lenders and borrowers, pay claims on guaranteed loans, collect principal and
     interest from borrowers, earn interest from Treasury on any uninvested funds, and transfer
     excess subsidy to Treasury’s general fund receipt account. Financing accounts are
     presented separately in the combined statement of budgetary resources (SBR) as
     nonbudgetary credit reform accounts to allow for a clear distinction from all other budgetary
     accounts. This facilitates reconciliation of the SBR to the Budget of the United States
     Government.
    Program accounts receive and obligate appropriations to cover the positive subsidy cost of
     a direct loan or loan guarantee when the loan is approved and disburses the subsidy cost to


62                                                        FY 2015 Agency Financial Report—U.S. Department of Education
                                                                                FINANCIAL SECTION
                                                               NOTES TO THE FINANCIAL STATEMENTS

     the financing account when the loan is issued. Program accounts also receive
     appropriations for administrative expenses.
    General fund receipt accounts receive amounts paid from financing accounts when there
     are negative subsidies for new loan disbursements or downward re-estimates of existing
     loans.

Budgetary Resources
Budgetary resources are amounts available to enter into new obligations and to liquidate them.
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 to cover the cost of the
initial loan disbursement as well as any related negative subsidy to be transferred to the
general fund receipt account. 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 budgetary resources that are not
obligated and that remain 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 to fund subsequent
increases to the estimated future costs of the loan programs. 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 2015 Agency Financial Report—U.S. Department of Education                                    63
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; allowance for subsidy for direct, defaulted
guaranteed, and acquired loans; the liability for loan guarantees; the amount payable or
receivable from annual credit program re-estimates and modifications of subsidy cost (general
program administration cost); and 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, which consist of
expenditure accounts used to record financial transactions funded by congressional
appropriations (which include amounts appropriated to fund subsidy and administrative costs of
loan programs), as well as receipt accounts; (2) revolving funds, which manage the activity of
self-funding programs whether through fees, sales, or other income (which include financing
accounts for loan programs); (3) special funds, which collect funds 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



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                                                                NOTES TO THE FINANCIAL STATEMENTS

requirements, or individual service obligations. Further, the Department utilizes the opportunity
to reduce the accounts receivable balances through the Treasury Offset 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
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 Monetary Assets is primarily comprised of the federal government’s interest in the
program assets held by state and nonprofit FFEL program guaranty agencies. Section 422A of
the HEA required FFEL guaranty agencies to establish federal student loan reserve funds
(federal funds). Federal funds 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.
Guaranty agencies’ federal funds are classified as non-entity assets with the public and are
offset by a corresponding liability due to Treasury. The federal funds are held by the guaranty
agencies but can only be used for certain specific purposes listed in the Department’s
regulations. The federal funds are the property of the U.S. and are reflected in the Budget of
the United States Government. Payments made to the Department from guaranty agencies’
federal funds 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 subsidy 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 defaulted 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
balance sheet and statement of net cost. The cash flows of these authorities also include


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FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

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 noncancellable 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
Department, for the HBCU Capital Financing program. The Department reports the



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                                                                NOTES TO THE FINANCIAL STATEMENTS

corresponding liability for full payment of principal and accrued interest on bonds as a payable
to the FFB. (See Note 10)
Accrued Grant Liability
Some grant recipients incur allowable expenditures as of the end of an accounting period but
have not yet been reimbursed by the Department. The Department will accrue a liability for
these allowable expenditures incurred that have not yet been reimbursed. The amount is
estimated using statistical sampling of unliquidated balances. (See Note 12)
Other Liabilities
Other liabilities include liabilities to Treasury in miscellaneous receipt accounts and capital
transfers. Liabilities to Treasury in miscellaneous receipt accounts reflect negative subsidy for
new loans disbursed and downward subsidy estimates that are accrued at year end. Capital
transfer liabilities represent net fund balances from pre-1992 loans payable to Treasury upon
collection. (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 nonfederal 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
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



FY 2015 Agency Financial Report—U.S. Department of Education                                        67
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

types of nonvested 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)




68                                                     FY 2015 Agency Financial Report—U.S. Department of Education
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                                                                                              NOTES TO THE FINANCIAL STATEMENTS

Note 2. Non-Entity Assets
As of September 30, 2015 and 2014, non-entity assets consisted of the following:
                                                               Non-Entity Assets
                                                                  (Dollars in Millions)

                                                                                                   2015              2014
           Non-Entity Assets
             Intragovernmental:
                Fund Balance with Treasury                                                     $          69     $          44
                  Total Intragovernmental                                                                 69                44
             With the Public:
                Cash and Other Monetary Assets                                                         1,561             1,471
                Credit Program Receivables, Net                                                          410               387
                Accounts Receivable, Net                                                                  67                63
                   Total With the Public                                                               2,038             1,921
           Total Non-Entity Assets                                                                     2,107             1,965
           Entity Assets                                                                           1,121,012         1,021,961
           Total Assets                                                                   $        1,123,119    $    1,023,926


The Department’s FY 2015 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 receipt account, 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)




FY 2015 Agency Financial Report—U.S. Department of Education                                                                     69
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

Note 3. Fund Balance with Treasury
Fund Balance with Treasury by status of funds and fund type, as of September 30, 2015 and
2014 consisted of the following:
                                            Fund Balance with Treasury
                                                        (Dollars in Millions)

                                                                                         2015
                                                                                                                 All
                                              General       Revolving           Special         Trust           Other
                                              Funds          Funds              Funds           Funds           Funds           Total
     Status of Funds
     Unobligated Balance:
                Available                     $ 11,805         $    550            $     -        $      1     $        -     $ 12,356
                Unavailable                      1,394           13,886                 14               -              -       15,294
     Obligated Balance, Not Yet Disbursed       52,638           23,260                  1               1              -       75,900
     Other                                           -                -                  -               -             69           69
     Fund Balance with Treasury               $ 65,837         $ 37,696           $     15        $      2     $       69     $103,619


                                                                                         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



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 balance ($15,294 million)
differs from unapportioned amounts on the SBR ($16,855 million) due to the Cash and Other
Monetary Assets ($1,561 million). Obligated balances not yet disbursed include undelivered
orders and unpaid expended authority. (See Note 5)




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                                                                                                NOTES TO THE FINANCIAL STATEMENTS

Note 4. Accounts Receivable
Accounts receivable, as of September 30, 2015 and 2014, consisted of the following:
                                                             Accounts Receivable
                                                                   (Dollars in Millions)

                                                                                                    2015
                                                                 Gross
                                                               Receivables                      Allowance          Net Receivables

           Intragovernmental                             $                   2              $                  -   $                    2
           With the Public                                                341                              (240)                   101

           Total                                         $                343               $              (240)   $               103


                                                                                                    2014
                                                                 Gross
                                                               Receivables                      Allowance          Net Receivables

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

           Total                                         $                327               $              (188)   $               139



Gross receivables by type, as of September 30, 2015 and 2014, are presented below.
                                                               Gross Receivables
                                                                    (Dollars in Millions)


                                                                                                     2015                  2014
           Category
              Institutional                                                                     $           235        $          209
              Individual                                                                                     70                   72
              State and Local                                                                                36                   43
              Intragovernmental                                                                                2                    3
           Total                                                                                $           343        $          327



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.




FY 2015 Agency Financial Report—U.S. Department of Education                                                                                71
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

Note 5. Cash and Other Monetary Assets
Cash and Other Monetary Assets consist of reserves held in the FFEL guaranty agencies’
Federal Fund. The net change in the valuation of the Federal Fund on the Department’s
Balance Sheet increases or decreases the Department’s Cash and Other Monetary Assets with
a corresponding change in Guaranty Agency Funds Due to Treasury. The table below presents
Cash and Other Monetary Assets for the years ended September 30, 2015 and 2014.
                                     Cash and Other Monetary Assets
                                                   (Dollars in Millions)

                                                                                         2015                      2014
       Beginning Balance, Cash and Other Monetary Assets                           $         1,471           $         1,482
         Valuation Increase in Guaranty Agency Federal Funds                                     92                      (11)
         Less: Collections from Guaranty Agency Federal Funds
              Excess Collections                                                                  2                          -
              Collections Remitted to Treasury                                                    2                          -

       Ending Balance, Cash and Other Monetary Assets                              $         1,561           $         1,471


The balance in the Federal Fund represents consolidated reserve balances of the 29 guaranty
agencies based on the Guaranty Agency Financial Reports that each agency submits annually
to the Department. Although the Department and the guaranty agencies operate on different
fiscal years, all guaranty agencies are subject to an annual audit based on form of organization.
A year-end valuation adjustment is made to adjust the Department’s balances in order to
comply with federal accounting principles and disclose funds held outside of Treasury.
The $92 million valuation increase in the Federal Fund in FY 2015 represents the change in the
estimated value of net assets held in the FFEL guaranty agency Federal Fund consolidated for
disclosure. The activity on which the balance reflected on the Balance Sheet is adjusted
reflects the net activity of guaranty agencies’ operations as adjusted based on the
Department’s procedures. During FY 2015, $2 million was remitted to the Department by a
guaranty agency and these funds were returned to Treasury.
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 $1,017.7 billion in outstanding credit program net receivables. This
outstanding balance is comprised primarily of Direct Loans, defaulted FFEL loans, and FFEL
loans purchased using authority provided in the Ensuring Continued Access to Student Loans
Act of 2008 (ECASLA). 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.




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                                                                                       NOTES TO THE FINANCIAL STATEMENTS

Credit program receivables, as of September 30, 2015 and 2014, consisted of the following:

                                             Credit Program Receivables, Net
                                                               (Dollars in Millions)


                                                                                                2015           2014
      Direct Loan Program Loan Receivables, Net                                            $    880,557    $   778,516
      FFEL Program Loan Receivables:
        FFEL Guaranteed Loan Program, Net (Pre-1992)                                              2,365          1,904
        FFEL Program (Post-1991):
          FFEL Guaranteed Loan Program, Net                                                      38,180         37,969
          Temporary Loan Purchase Authority:
            Loan Purchase Commitment, Net                                                        32,865         36,556
            Loan Participation Purchase, Net                                                     59,516         64,513
            ABCP Conduit, Net                                                                     1,778          1,922
      Federal Perkins and Other Loan Program Loan Receivables, Net                                  410           387
      TEACH Program Loan Receivables, Net                                                           631           536
      HEAL Program Loan Receivables, Net                                                            123           115
      Facilities Loan Programs Loan Receivables, Net                                              1,308          1,127

      Total                                                                            $       1,017,733   $   923,545


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, 2015 and 2014, total principal balances outstanding of Direct Loans were
approximately $800.8 billion and $694.0 billion, respectively.
The Department records an estimated obligation each year for direct loan awards to be made
in a fiscal year based on estimates of schools’ receipt of aid applications. Half of all loan
awards are issued in the fourth quarter of the fiscal year. Loans awarded are typically
disbursed in multiple installments over an academic period. As a result, loans may be
disbursed over multiple fiscal years. Loan awards may not be fully disbursed due to students
leaving or transferring to other schools. The Department’s estimate may also not reflect the
actual amount of awards made. Based on historical averages, the Department expects
approximately 8.1% of the amount obligated for new loan awards will not be disbursed.




FY 2015 Agency Financial Report—U.S. Department of Education                                                             73
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

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)

                                                                                      2015                       2014
     Principal Receivable                                                       $      800,811             $      694,006
     Interest Receivable                                                                44,250                     37,152
       Total                                                                           845,061                    731,158
     Allowance for Subsidy                                                              35,496                     47,358
     Direct Loan Program Loan Receivables, Net                                  $      880,557             $      778,516


Direct Loan program loan receivables are defaulted and nondefaulted loans owned and held by
the Department. Of the $845.1 billion in gross receivables, as of September 30, 2015,
$44.1 billion (5.2 percent) in loan principal was in default and had been transferred to the
Department’s defaulted loan servicer, compared to $33.9 billion (4.6 percent) as of September
30, 2014. As of September 30, 2015 and 2014, an additional $1.2 billion and $0.5 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. Allowance for subsidy is subject to interest rates,
default rates, fees, and other costs. A positive allowance for subsidy is substantially a factor of
projected borrower interest exceeding the cost of Treasury borrowings and loan forgiveness.
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)
                                                                                2015                           2014
     Beginning Balance, Allowance for Subsidy                             $        47,358                $        65,247
     Activity
     Fee Collections                                                                 (1,618)                       (1,623)
     Loan Cancellations                                                                4,777                         2,068
     Subsidy Allowance Amortization                                                 (16,373)                      (11,319)
     Other                                                                               460                         1,111
     Total Activity                                                                 (12,754)                       (9,763)
     Components of Subsidy Transfers
     Interest Rate Differential                                                        8,993                        33,161
     Defaults, Net of Recoveries                                                       (253)                       (1,409)
     Fees                                                                                641                         1,756
     Other                                                                           (3,195)                      (11,418)
     Current Year Subsidy Transfers                                                   6,186                         22,090

     Loan Modification                                                               (9,936)                               -

     Components of Subsidy Re-estimates
     Interest Rate Re-estimates                                                      (1,506)                       (8,344)
     Technical and Default Re-estimates                                                6,148                      (21,872)
     (Upward)/Downward Subsidy Re-estimates                                           4,642                       (30,216)

     Ending Balance, Allowance for Subsidy                                  $        35,496                $        47,358




74                                                                       FY 2015 Agency Financial Report—U.S. Department of Education
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                                                                                           NOTES TO THE FINANCIAL STATEMENTS

Loan cancellations include write-offs of loans because the borrower died, became disabled, or
declared bankruptcy. Subsidy transfers reflect the subsidy cost for loans disbursed during the
current fiscal year. 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 reflects the cost of finalizing the Treasury borrowing rate to be used for borrowings
received to fund the disbursed portion of the loan awards obligated, and any related negative
subsidy.
The following schedule summarizes the Direct Loan interest expense and interest revenue for
the years ended September 30, 2015 and 2014:

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

                                                                                           2015                     2014
      Interest Expense on Treasury Borrowing                                           $       27,593       $           25,152
      Total Interest Expense                                                           $       27,593       $           25,152


      Interest Revenue from the Public                                                 $         39,760     $           32,801
      Amortization of Subsidy                                                                  (16,373)               (11,319)
      Interest Revenue on Uninvested Funds                                                        4,206                  3,670
      Total Interest Revenue                                                           $         27,593     $           25,152


The following schedule summarizes the Direct Loan subsidy expense for the years ended
September 30, 2015 and 2014:
                                        Direct Loan Program Subsidy Expense
                                                               (Dollars in Millions)

                                                                                               2015                 2014
      Components of Negative Subsidy Transfers
      Interest Rate Differential                                                           $       8,993        $      33,161
      Defaults, Net of Recoveries                                                                  (253)              (1,409)
      Fees                                                                                           641                1,756
      Other                                                                                      (3,195)             (11,418)
      Negative Subsidy Transfers                                                                   6,186               22,090

      Loan Modification                                                                          (9,936)                     -
      (Upward)/Downward Subsidy Re-estimates                                                      4,642              (30,216)

      Direct Loan Subsidy Expense                                                          $          892       $      (8,126)


Direct Loan program re-estimated subsidy cost was adjusted downward by $4.6 billion in
FY 2015. Updated discount rates for the 2014 and 2013 cohorts decreased cost by $6.2 billion.
Higher participation in income dependent repayment plans increased cost by $15 billion. A new
model was developed that much more accurately reflects debts and incomes of recent income
dependent repayment borrowers. While both debts and incomes increased in the new model,
for consolidated borrowers the increase in income compared to debt resulted in debts
becoming more affordable resulting in a $5.8 billion decrease in costs. Costs increased
$1.8 billion due to increases in default rates. Changes in prepayment rates reflect larger than
expected prepayment activity, leading to decreased interest earnings resulting in $3.5 billion in
upward subsidy cost. Costs decreased $5.7 billion due to higher forbearance rates. Interest
accrues during forbearance and that interest is eventually paid to the Department. Other
assumption updates produced offsetting costs, with the remainder attributable to interest on the
re-estimate.



FY 2015 Agency Financial Report—U.S. Department of Education                                                                     75
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

Subsidy rates are sensitive to interest rate fluctuations; for example, a 1 percent increase in
projected borrower interest rates would reduce projected Direct Loan subsidy cost by
$4.3 billion. Re-estimated costs only include cohorts that are 90 percent disbursed; cohort
years 1994–2014.
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 subsidy cost by $4.4 billion.
Changes in the availability of repayment plans increased subsidy cost by $18.6 billion. Subsidy
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 (PAYE)
repayment plan. The modified cost for subsidy of this plan for cohort years 1994–2013 is
$8.3 billion.
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 subsidy costs only include those cohorts that are 90 percent disbursed; cohort
years 1994–2013.
FY 2015 Modification. 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 the discount rate used to calculate the cost of the
modification and the interest rate at which the cohort pays or earns interest.

The Department modified Direct Loans in FY 2015. The PAYE loan repayment option available
to eligible borrowers caps monthly payments for many recent graduates at an amount that is
affordable based on their income. PAYE, first announced in October 2011, caps payments for
Federal Direct Student Loans at 10 percent of discretionary income for eligible borrowers.
Borrowers formerly ineligible for the more generous PAYE repayment plan are now eligible for
a modified version of PAYE leading to increased costs resulting in a $9.3 billion upward
modification of subsidy cost and a $629 million net upward modification adjustment transfer. In
FY 2015, the Department forgave $2.1 billion in interest for borrowers participating in the
PAYE/income-based repayment (IBR) plans, which provide that, if the borrower’s monthly
payment amount is not sufficient to pay the accrued interest on the borrower’s direct subsidized
loan or the subsidized portion of a direct consolidation loan, the Secretary does not charge the
borrower the remaining accrued interest for a period not to exceed three consectutive years
from the established repayment period start date on that loan under the PAYE/IBR plan.
The subsidy rates applicable to the 2015 loan cohort year follow:
                             Direct Loan Subsidy Rates—Cohort 2015
                                         Interest
                                        Differential   Defaults      Fees          Other             Total

     Stafford                             3.97%        0.12%        (1.07)%          5.73%           8.75%
     Unsubsidized Stafford               (14.83)%      0.15%        (1.07)%          6.83%          (8.92)%
     PLUS                                (22.67)%      0.25%        (4.29)%          5.84%         (20.87)%
     Consolidation                       (1.50)%       (0.14)%       0.00%          10.68%           9.04%
     Total                               (8.45)%       0.07%        (1.16)%          7.69%          (1.87)%




76                                                         FY 2015 Agency Financial Report—U.S. Department of Education
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                                                                                            NOTES TO THE FINANCIAL STATEMENTS

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 2015 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
2017 President’s Budget.
The subsidy 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, 2015 and 2014:
                          Direct Loan Program Loan Disbursements by Loan Type
                                                               (Dollars in Millions)

                                                                                           2015                2014
      Stafford                                                                         $      (23,953)    $       (25,877)
      Unsubsidized Stafford                                                                   (52,698)            (54,740)
      PLUS                                                                                    (19,163)            (18,910)
      Consolidation                                                                           (46,434)            (34,525)
      Total Expenditures                                                               $     (142,248)    $      (134,052)



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 subsidy costs. The net receivables include
estimates of future prepayments of existing loans through consolidations; they do not reflect
subsidy costs associated with anticipated future consolidation loans.
Direct Loan consolidations increased from $35 billion during FY 2014 to $46 billion during
FY 2015. 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.




FY 2015 Agency Financial Report—U.S. Department of Education                                                                 77
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

Federal Family Education Loan Program. As a result of the SAFRA Act, no new FFEL loans
have been made since July 1, 2010. Federal guarantees on FFEL program loans and
commitments remain in effect for loans made before July 1, 2010, unless they were sold to the
Department through an ECASLA program, consolidated into a direct loan, or otherwise
satisfied, discharged, or cancelled. As of September 30, 2015 and 2014, total principal
balances outstanding of guaranteed loans held by lenders were approximately $220 billion and
$242 billion, respectively. As of September 30, 2015 and 2014, the estimated maximum
government exposure on outstanding guaranteed loans held by lenders was approximately
$215 billion and $236 billion, respectively. Of the insured amount, the Department would pay a
smaller amount to the guaranty agencies. The rates range from 75 to 100 percent of the loan
value depending on when the loan was made and the guaranty agency’s claim experience.




78                                                     FY 2015 Agency Financial Report—U.S. Department of Education
                                                                                                            FINANCIAL SECTION
                                                                                           NOTES TO THE FINANCIAL STATEMENTS


                                         FFEL Program Loan Receivables, Net
                                                               (Dollars in Millions)
                                                                                             2015               2014

      FFEL Program (Pre-1992)
        Principal Receivable                                                           $         4,388     $       4,707
        Interest Receivable                                                                      6,149             5,810
          Total                                                                                10,537            10,517
        Allowance for Subsidy                                                                  (8,162)           (8,586)
        Liabilities for Loan Guarantees                                                            (10)              (27)
      FFEL Guaranteed Loan Program, Net (Pre-1992)                                               2,365             1,904

      FFEL Program (Post-1991)
      FFEL Guaranteed Loan Program:
      Principal Receivable                                                                     33,415            34,251
      Interest Receivable                                                                        5,756             5,273
        Total                                                                                  39,171            39,524
         Allowance for Subsidy                                                                 (4,389)           (5,773)
         Liabilities for Loan Guarantees                                                         3,398             4,218
      FFEL Guaranteed Loan Program, Net (Post-1991)                                            38,180            37,969

      Temporary Loan Purchase Authority:
      Loan Purchase Commitment:
      Principal Receivable                                                                     26,474            29,401
      Interest Receivable                                                                       1,981             1,927
        Total                                                                                  28,455            31,328
           Allowance for Subsidy                                                                4,410             5,228
      Loan Purchase Commitment, Net                                                            32,865            36,556
      Loan Participation Purchase:
      Principal Receivable                                                                     48,540            52,782
      Interest Receivable                                                                       3,403             3,358
        Total                                                                                  51,943            56,140
           Allowance for Subsidy                                                                7,573             8,373
      Loan Participation Purchase, Net                                                         59,516            64,513
      ABCP Conduit:
      Principal Receivable                                                                      1,887             2,036
      Interest Receivable                                                                         240               218
        Total                                                                                   2,127             2,254
           Allowance for Subsidy                                                                (349)             (332)
      ABCP Conduit, Net                                                                         1,778             1,922

      FFEL Program Loan Receivables, Net                                               $      134,704      $    142,864


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 2015 Agency Financial Report—U.S. Department of Education                                                                79
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

The FFEL guaranteed student loan financing account has a negative estimated liability for loan
guarantees of $3.4 billion and $4.2 billion as of September 30, 2015 and 2014, 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)

                                                                                   2015                        2014
     Beginning Balance, FFEL Financing Account Liability for
     Loan Guarantees                                                        $           4,218            $          4,260
     Activity
     Interest Supplement Payments                                                         896                       1,094
     Claim Payments                                                                     6,917                       8,914
     Fee Collections                                                                  (1,926)                     (2,156)
     Interest on Liability Balance                                                      1,826                       1,843
     Other                                                                          (12,797)                     (13,785)
     Total Activity                                                                   (5,084)                     (4,090)
     Components of Loan Modifications
     Loan Modification Costs                                                                 -                      4,020
     Modification Adjustment Transfers                                                       -                       (581)
     Loan Modifications                                                                      -                      3,439


     (Upward)/Downward Subsidy Re-estimates                                             4,264                         609

     Ending Balance, FFEL Financing Account Liability for Loan
     Guarantees                                                                         3,398                       4,218
     FFEL Liquidating Account Liability for Loan Guarantees                               (10)                        (27)
     Liabilities for Loan Guarantees                                        $           3,388            $          4,191


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




80                                                                      FY 2015 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)

                                                                                               2015                       2014
      Beginning Balance, Allowance for Subsidy                                             $         5,228            $        5,188
      Activity
      Subsidy Allowance Amortization                                                                  (724)                      (749)
      Loan Cancellations                                                                               274                        116
      Contract Collection Cost and Other                                                                40                         72
      Total Activity                                                                                  (410)                      (561)


      (Upward)/Downward Subsidy Re-estimates                                                          (408)                       601

      Ending Balance, Allowance for Subsidy                                                $         4,410            $        5,228



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

                                                                                               2015                       2014
      Beginning Balance, Allowance for Subsidy                                             $         8,373            $        8,208
      Activity
      Subsidy Allowance Amortization                                                                (1,362)                   (1,304)
      Loan Cancellations                                                                               518                        224
      Contract Collection Cost and Other                                                                44                         93
      Total Activity                                                                                  (800)                      (987)


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

      Ending Balance, Allowance for Subsidy                                                $         7,573            $        8,373


The following schedule provides FFEL program subsidy expense for the years ended
September 30, 2015 and 2014, respectively:
                                                  FFEL Program Subsidy Expense
                                                                   (Dollars in Millions)

                                                                                                        2015                   2014
           FFEL Guaranteed Loan Program Subsidy Re-estimates                                    $             4,264       $           609
           Loan Purchase Commitment Subsidy Re-estimates                                                      (408)                   601
           Loan Participation Purchase Subsidy Re-estimates                                                       -                 1,152
           ABCP Conduit Subsidy Re-estimates                                                                      -                   203
           FFEL Program (Upward)/Downward Subsidy Re-estimates                                                3,856                 2,565

           FFEL Guaranteed Loan Program Modification Costs                                                        -                 4,020

           FFEL Program Subsidy Expense                                                         $             3,856       $         6,585




FY 2015 Agency Financial Report—U.S. Department of Education                                                                                81
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

FFEL guaranteed re-estimated subsidy cost was adjusted downward by $3.9 billion in FY 2015.
Subsidy costs decreased $2.1 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. Subsidy costs decreased
$706 million due to lower deferment rates on consolidated loans that have subsidized
components of outstanding debt. The Department pays interest benefits when loans are in
deferment, so lower deferment rates mean less interest benefits when loans are in deferment,
so lower deferment rates mean less interest benefit payments to lenders. Other assumption
updates produced offsetting subsidy costs, with the remainder attributable to interest on the
re-estimate.
Subsidy rates are 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
subsidy costs by $17.5 billion.
FFEL guaranteed re-estimated subsidy cost was adjusted downward by $0.6 billion in FY 2014.
Subsidy 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. Subsidy costs decreased $111 million due to maturity and debt distribution
assumption updates. Other assumption updates produced offsetting subsidy 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 subsidy costs by $18 billion.
FY 2014 Modification. The Department modified FFEL loans in FY 2014, but not in
FY 2015.The Bipartisan Budget Act of 2013 eliminated guaranty agencies’ retention share of
original defaulted student loan amounts, and reduced the cap on the amount of collection costs
they can charge a borrower. 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, 2015 and 2014, loan and interest receivables, net of allowance for losses,
were $410 million and $387 million, respectively. These receivables are valued at net realizable
value with estimated allowance for losses of $168 million and $161 million as of September 30,
2015 and 2014, 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
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.




82                                                        FY 2015 Agency Financial Report—U.S. Department of Education
                                                                                                          FINANCIAL SECTION
                                                                                         NOTES TO THE FINANCIAL STATEMENTS

As of September 30, 2015 and 2014, loan receivables were $631 million and $536 million,
respectively. The receivable balance is net of allowance for subsidy of $108 million and
$120 million as of September 30, 2015 and 2014, respectively.
The subsidy rates applicable to the 2015 loan cohort year follow:
                                          TEACH Subsidy Rates—Cohort 2015
                                                                Interest
                                                               Differential   Defaults     Fees     Other      Total
     Subsidy Rates                                              12.39%         0.23%       0.00%     3.95%    16.57%


HEAL Program. The Department assumed responsibility in FY 2014 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, as
of September 30, 2015 and 2014 were $123 million and $115 million, respectively. 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 $1.4 billion in outstanding borrowing
from the FFB to support loans made to HBCU institutions and approximately $236 million
obligated to support near term lending as of September 30, 2015.
The Department administers the College Housing and Academic Facilities Loan (CHAFL)
program, 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 2015 Agency Financial Report—U.S. Department of Education                                                             83
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)

                                                                                           2015                          2014
     Principal Receivable                                                              $      1,463             $           1,324
     Interest Receivable                                                                         14                            12
       Total                                                                                  1,477                         1,336
     Allowance for Subsidy                                                                    (169)                         (209)
     Facilities Loan Programs Loan Receivables, Net                                    $        1,308           $           1,127



Administrative Expenses
Administrative expenses, for the years ended September 30, 2015 and 2014, consisted of the
following:
                                          Administrative Expenses
                                                     (Dollars in Millions)

                                                      2015                                                   2014
                                       Direct Loan                  FFEL                   Direct Loan                 FFEL
                                        Program                   Program                   Program                  Program
     Operating Expense                $        653               $           442           $         604             $      390
     Other Expense                              28                            18                        22                    14

     Total                            $        681               $           440           $         626             $      404


Note 7. Property and Equipment, Net and Leases
Property and equipment, as of September 30, 2015 and 2014, consisted of the following:
                                          Property and Equipment, Net
                                                         (Dollars in Millions)

                                                                                               2015
                                                                     Asset                  Accumulated                   Net Asset
                                                                     Cost                   Depreciation                   Value

        Information Technology, Internal Use Software,
        and Telecommunications Equipment                     $               196           $         (175)           $              21
        Furniture and Fixtures                                                   3                       (3)                          -

        Property and Equipment, Net                          $               199           $         (178)           $              21



                                                                                               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


The Depreciation expense was $1 million for the years ended September 30, 2015 and 2014.


84                                                                             FY 2015 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.
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 21 privately owned and 12 publicly owned
buildings in 20 cities. Building lease expense, as of September 30, 2015 and 2014, was $73
million and $70 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)

                                 2015                                                                   2014
           FY                                         Amount                             FY                           Amount
           2016                                           83                             2015                             78
           2017                                           76                             2016                             83
           2018                                           81                             2017                             88
           2019                                           79                             2018                             91
           2020                                           82                             2019                             97
           After 2020                                     84                             After 2019                      100
           Total                                      $    485                           Total                        $   537


Note 8. Other Assets
Other intragovernmental assets primarily consist of advance payments to the U.S. Department
of the 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 $76 million and $55 million as of September 30,
2015 and 2014, 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 $6 million and $13 million as of September 30,
2015 and 2014, respectively.




FY 2015 Agency Financial Report—U.S. Department of Education                                                                    85
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

Note 9. Accounts Payable
Accounts payable, as of September 30, 2015 and 2014, consisted of the following:
                                               Accounts Payable
                                                     (Dollars in Millions)

                                                                                        2015                        2014
       Accrual for Unreimbursed Loan Disbursements                            $                2,938        $              3,027
       In Process Disbursements:
          Direct Loans                                                                           298                         312
          Grants                                                                                 245                         264
          FFEL Claim Payments                                                                    118                         311
       Contractual Services                                                                      159                         212
       Other                                                                                     (63)                      (126)
       Accounts Payable to the public                                                          3,695                       4,000

       Intragovernmental Accounts Payable                                                          1                             1

       Total Accounts Payable                                                       $          3,696            $          4,001



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 2015 and FY 2014 accounts payable other abnormal balances of $(63) million and $(126)
million, respectively, are primarily due to temporary adjustments related to FFEL Guaranteed
Loan program collections of fees, principal, and interest on defaulted loans.

Note 10. Debt
Debt, as of September 30, 2015 and 2014, consisted of the following:
                                                    Debt
                                              (Dollars in Millions)

                                                                             2015
                                       Beginning                                                         Ending
                                        Balance           Borrowing               Repayments             Balance
      Treasury Debt
      Direct Loan Program              $ 819,007          $    159,667              $   (68,747)         $ 909,927
      FFEL Program
         Guaranteed Loan Program          43,254                     -                         -            43,254
         Loan Purchase Commitment         36,271                   732                   (3,295)            33,708
         Loan Participation Purchase      64,302                 1,825                   (5,145)            60,982
         ABCP Conduit                      1,973                     -                     (146)             1,827
      TEACH Program                          555                   108                      (17)               646
      Facilities Loan Programs                37                     -                       (8)                29
      Total Treasury Debt                965,399               162,332                  (77,358)         1,050,373
      Debt to the FFB
      HBCU                                 1,272                   160                      (29)             1,403
      Total Debt to the FFB                1,272                   160                      (29)             1,403
      Total                            $ 966,671          $    162,492              $   (77,387)        $1,051,776




86                                                                       FY 2015 Agency Financial Report—U.S. Department of Education
                                                                                                     FINANCIAL SECTION
                                                                                    NOTES TO THE FINANCIAL STATEMENTS

                                                                             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


The Department borrows from Treasury to fund the disbursement of new loans and the
payment of credit program outlays and related costs. During FY 2015, debt increased 9 percent
from $967 billion in the prior year to $1,052 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 86 percent of the Department’s debt, as of September 30, 2015, 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 2015 totaled $160 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 2015, TEACH net borrowing of $91 million was used for the advance of new grants
and repayments of principal made to Treasury. In FY 2015, debt in HBCU increased by
$131 million, or 10 percent. This total represents the aggregate of new bonds administered and
repayments made on previously issued bonds.




FY 2015 Agency Financial Report—U.S. Department of Education                                                        87
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

Note 11. Other Liabilities
Other liabilities, as of September 30, 2015 and 2014, consisted of the following:
                                                    Other Liabilities
                                                          (Dollars in Millions)

                                                                         2015                                           2014
                                                               Intragovern-   With the                       Intragovern-    With the
                                                                  mental       Public                           mental       Public
     Liabilities Covered by Budgetary Resources
       Current
          Advances From Others                                  $            14             $        -        $          26         $         -
          Employer Contributions and Payroll Taxes                            3                      -                    3                   -
          Liability for Deposit Funds and Clearing
           Accounts                                                          7                     84                   (22)                74
          Accrued Payroll and Benefits                                       -                     15                      -                13
          Deferred Revenue                                                   -                     18                      -                50
          Liabilities in Miscellaneous Receipt Accounts                  5,527                      -                 3,783                  -
     Total Other Liabilities Covered by
     Budgetary Resources                                                 5,551                    117                 3,790                137


     Liabilities Not Covered by Budgetary Resources
       Current
          Accrued Unfunded Annual Leave                                           -                38                      -                38
       Noncurrent
          Accrued Unfunded FECA Liability                                    3                      -                     3                  -
          Custodial Liability                                                -                      -                     2                  -
          Liabilities in Miscellaneous Receipt Accounts                    395                      -                   376                  -
          Capital Transfers                                              2,786                      -                 2,242                  -
          Accrued FECA Actuarial Liability                                   -                     16                     -                  2
     Total Other Liabilities Not Covered by
     Budgetary Resources                                                 3,184                     54                 2,623                 40

     Other Liabilities                                           $       8,735            $       171          $      6,413        $       177


Other liabilities include current and noncurrent liabilities. The current liabilities covered by
budgetary resources primarily consist of $5.5 billion for executed negative subsidy transfers
and executed downward re-estimates.
The noncurrent liabilities not covered by budgetary resources primarily relate to capital
transfers, excess unanticipated collections on defaulted loans in liquidating accounts in the
amount of $2.8 billion, and the student loan receivables of the Federal Perkins Loan program in
the amount of $395 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 $3.2 billion and $2.6 billion as
of September 30, 2015 and 2014, respectively.
As of September 30, 2015 and 2014, liabilities totaled $1,068.3 billion and $981.2 billion,
respectively. Of this amount, liabilities covered by budgetary resources totaled $1,065.1 billion
and $978.6 billion as of September 30, 2015 and 2014, respectively.




88                                                                                    FY 2015 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, 2015 and 2014,
consisted of the following:
                                                         Accrued Grant Liability
                                                               (Dollars in Millions)

                                                                                                 2015                2014
           FSA                                                                         $                1,571    $           1,719
           OESE                                                                                          231                  386
           OSERS                                                                                         144                  182
           Other                                                                                         431                  200

           Accrued Grant Liability                                                     $                2,377    $           2,487

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, 2015 and 2014, consisted of the following:
                                                     Unexpended Appropriations
                                                               (Dollars in Millions)

                                                                                                  2015                2014
           Unobligated Balances:
              Available                                                                    $            11,768   $          12,078
              Not Available                                                                              1,211               1,169
           Undelivered Orders                                                                           49,761              53,200

           Unexpended Appropriations                                                       $            62,740   $          66,447


Cumulative Results of Operations. The cumulative results of operations of $(7,937) million
and $(23,741) million as of September 30, 2015 and 2014, 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
$(14,293) million and $(36,767) million as of September 30, 2015 and 2014, respectively. The
amount was primarily comprised of Direct Loan and FFEL program activity.
Appropriations Received. Appropriations received was $100,955 million and $95,293 million
as of September 30, 2015 and 2014, respectively, and comprised primarily of Pell Grant, Direct
Loan, Special Education, and Education for the Disadvantaged programs.




FY 2015 Agency Financial Report—U.S. Department of Education                                                                         89
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 has 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.

           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.




90                                                               FY 2015 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)
                                                                      2015
                                               FSA                               OESE           OSERS         Other         Total
Increase College Access, Quality, and Completion
Gross Cost
  Intragovernmental                                             $ 33,873         $        -        $      -   $      80     $33,953
  With the Public                                                 25,627                  -               -       4,117      29,744
  Total Gross Program Costs                                        59,500                 -               -       4,197      63,697

Earned Revenue
  Intragovernmental                                                (5,134)                -               -        (11)      (5,145)
  With the Public                                                 (26,413)                -               -        (42)     (26,455)
  Total Program Earned Revenue                                    (31,547)                -               -        (53)     (31,600)
Total Program Cost                                                 27,953                 -               -       4,144      32,097
Improve Preparation for College and Career from Birth Through 12th Grade, Especially for Children with
High Needs
Gross Cost
  Intragovernmental                                                       -             179               -            -        179
  With the Public                                                          -         22,169               -            2     22,171
  Total Gross Program Costs                                              -           22,348               -            2     22,350

Earned Revenue
  Intragovernmental                                                          -         (12)               -             -       (12)
  With the Public                                                            -          (8)               -             -        (8)
  Total Program Earned Revenue                                               -         (20)               -             -       (20)
Total Program Cost                                                           -       22,328               -            2     22,330
Ensure Effective Educational Opportunities for All Students
Gross Cost
  Intragovernmental                                                       -               -             91            33        124
  With the Public                                                            -            -        15,776          756       16,532

  Total Gross Program Costs                                              -                -        15,867          789       16,656
Earned Revenue
  Intragovernmental                                                          -            -             (2)             -           (2)
  With the Public                                                            -            -             (8)           (1)           (9)
  Total Program Earned Revenue                                               -            -            (10)           (1)       (11)
Total Program Cost                                                           -            -        15,857          788       16,645
Enhance the Education System’s Ability to Continuously Improve
Gross Cost
  Intragovernmental                                                       -               -               -         100          100
  With the Public                                                          -              -               -       2,312        2,312
  Total Gross Program Costs                                              -                -               -       2,412        2,412
Earned Revenue
  Intragovernmental                                                          -            -               -         (4)          (4)
  With the Public                                                            -            -               -        (55)         (55)
  Total Program Earned Revenue                                               -            -               -        (59)         (59)
Total Program Cost                                                           -            -               -       2,353        2,353


Net Cost of Operations                                          $ 27,953         $ 22,328        $ 15,857     $ 7,287       $ 73,425




FY 2015 Agency Financial Report—U.S. Department of Education                                                                        91
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




92                                                                  FY 2015 Agency Financial Report—U.S. Department of Education
                                                                                                                  FINANCIAL SECTION
                                                                                                 NOTES TO THE FINANCIAL STATEMENTS

Note 15. Interest Expense and Interest Revenue
For FY 2015 and FY 2014, interest expense and interest revenue by program consisted of the
following:
                                          Interest Expense and Interest Revenue
                                                               (Dollars in Millions)
                                                                                                2015
                                                               Expenses                                          Revenue
                                                  Federal      Nonfederal              Total           Federal   Nonfederal   Total


       Direct Loan Program                        $ 27,593          $        -    $27,593              $ 4,206      $23,387   $27,593
       FFEL Program :
          Guaranteed Loan Program                      2,083         (1,826)              257              257            -       257
          Loan Purchase Commitment                     1,091               -            1,091               63        1,028     1,091
          Loan Participation Purchase                  2,018               -            2,018              130        1,888     2,018
          ABCP Conduit                                    60               -               60                4           56        60
       TEACH Program                                      20               -               20                2           18        20
       Other Programs                                     40               -               40               11           32        43

       Total                                      $ 32,905         $(1,826)       $31,079              $ 4,673      $26,409   $31,082


                                                                                                2014
                                                               Expenses                                          Revenue
                                                  Federal      Nonfederal              Total           Federal   Nonfederal   Total


       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


Federal interest expense is recognized on the Department’s outstanding borrowing from
Treasury (debt). The Direct Loan and FFEL programs have $910 billion and $140 billion in
debt, respectively, as of September 30, 2015. 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.
Nonfederal interest expense results from the amortization of loan subsidy. Nonfederal interest
revenue is interest earned from the public on credit program receivables held by the
Department. The Department holds $1,017.7 billion in outstanding credit program net
receivables as of September 30, 2015.




FY 2015 Agency Financial Report—U.S. Department of Education                                                                            93
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, 2015, budgetary resources were $350 billion and net agency outlays were $167 billion. As
of September 30, 2014, budgetary resources were $356 billion and net agency outlays were
$180 billion.
Obligations Incurred by Apportionment Type and Category
Obligations incurred by apportionment type and category, as of September 30, 2015 and 2014,
consisted of the following:
                     Obligations Incurred by Apportionment Type and Category
                                                (Dollars in Millions)

                                                                                 2015                           2014
       Direct:
          Category A                                                     $             2,083           $             1,755
          Category B                                                                 318,212                       329,043
          Exempt from Apportionment                                                      104                           194
         Total Direct Apportionment                                                  320,399                       330,992
       Reimbursable:
         Category A                                                                          4                             3
         Category B                                                                         64                            68

       Obligations Incurred                                                  $       320,467               $       331,063


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, 2015 and 2014, consisted of the following:
                                      Unused Borrowing Authority
                                                (Dollars in Millions)
                                                                                 2015                          2014
       Beginning Balance, Unused Borrowing Authority                         $         61,327          $            138,695
       Current Year Borrowing Authority                                               171,807                       182,860
       Funds Drawn From Treasury                                                    (162,492)                     (173,451)
       Borrowing Authority Withdrawn                                                 (15,813)                      (86,777)

       Ending Balance, Unused Borrowing Authority                            $          54,829             $          61,327


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.




94                                                                  FY 2015 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, 2015 and 2014, consisted of the following:
                                                               Undelivered Orders
                                                                  (Dollars in Millions)

                                                                                                    2015                    2014
           Budgetary                                                                      $                49,838   $              53,332
           Nonbudgetary                                                                                    75,064                  76,889

           Undelivered Orders (Unpaid)                                                    $            124,902      $          130,221


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, 2015 and 2014,
consisted of the following:
                                                   Distributed Offsetting Receipts
                                                                  (Dollars in Millions)
                                                                                                    2015                    2014
           Negative Subsidies and Downward Re-estimates:
             FFEL Program                                                                 $                 4,658       $           7,945
             Direct Loan Program                                                                            8,211                  31,551
             Facilities Loan Programs                                                                          83                      24
             TEACH Program                                                                                     31                      13
             HEAL Program                                                                                      19                       -
             Total Negative Subsidies and Downward Re-estimates                                            13,002                  39,533
           Other                                                                                              103                     119
           Distributed Offsetting Receipts                                                    $            13,105       $          39,652



Explanation of Differences Between the Statement of Budgetary
Resources and the Budget of the United States Government
The FY 2017 Budget of the United States Government (President’s Budget), which presents
the actual amounts for the year ended September 30, 2015, has not been published as of the
issue date of these financial statements. The FY 2017 President’s Budget is scheduled for
release in February 2016.




FY 2015 Agency Financial Report—U.S. Department of Education                                                                                95
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

A reconciliation of the FY 2014 SBR to the FY 2016 President’s Budget (FY 2014 actual
amounts) for budgetary resources, obligations incurred, distributed offsetting receipts, and net
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                                 $   356,009           $     331,063          $     39,652         $    179,761
         Expired Funds                                (1,590)                   (438)                      -                     -
         FFEL Guaranty Agency amounts
         Included in the President’s Budget           10,749                  10,749                       -                     -
         Distributed Offsetting Receipts                      -                      -                     -              39,652
         Other                                             (1)                     (1)                     3                     5
       Budget of the United States
       Government1                               $   365,167           $     341,373          $     39,655         $    219,418
          1
          Amounts obtained from the Appendix, Budget of the United States Government, FY 2016.


Reconciling differences exist because the President’s Budget excludes expired funds.
Additionally, 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. 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 incurred are estimated and
disclosed in the President’s Budget to approximate the gross activities of the combined federal
fund. Amounts reported on the FY 2014 SBR for the federal fund are compiled by 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.




96                                                                       FY 2015 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, 2015 and 2014, are
presented below:

                              Reconciliation of Net Cost of Operations to Budget
                                                               (Dollars in Millions)

                                                                                                    2015                 2014

 Resources Used to Finance Activities:
   Obligations Incurred                                                                     $         320,467    $         331,063
   Spending Authority from Offsetting Collections and Recoveries                                    (145,810)            (196,485)
   Offsetting Receipts                                                                               (13,105)             (39,652)
     Net Budgetary Resources Obligated                                                                161,552               94,926
   Imputed Financing from Costs Absorbed by Others                                                         30                   36
   Other Financing Sources                                                                           (14,293)             (36,767)
     Net Other Resources                                                                             (14,263)             (36,731)

 Net Resources Used to Finance Activities                                                            147,289               58,195



 Resources Used or Generated for Items Not Part of the Net Cost of Operations:
   (Increase)/Decrease in Budgetary Resources Obligated but Not Yet Provided                            5,177              85,345
   Resources that Fund Subsidy Re-estimates Accrued in Prior Period                                  (20,131)               2,383
   Credit Program Collections                                                                        102,183               80,365
   Acquisition of Fixed Assets                                                                            (15)                 (4)
   Acquisition of Net Credit Program Assets or Liquidation of Liabilities for Loan
   Guarantees                                                                                       (165,850)            (186,999)
   Resources from Non-Entity Activity                                                                  14,948               36,787
      Net Resources That Do Not Finance the Net Cost of Operations                                   (63,688)               17,877

 Net Resources Used to Finance the Net Cost of Operations                                             83,601               76,072



 Components of the Net Cost of Operations That Will Not Require or Generate Resources in the Current Period:
   Change in Depreciation                                                                 1                (1)
   Subsidy Amortization and Interest on the Liability for Loan Guarantees          16,710              11,615
   Other                                                                                  -               581
       Total Components Not Requiring or Generating Resources                                         16,711               12,195

    Increase/(Decrease) in Annual Leave Liability                                                           -                    2
    Accrued Re-estimates of Credit Subsidy Expense                                                      2,598               20,130
    Increase in Exchange Revenue Receivable from the Public                                          (29,486)             (25,233)
    Change in Accrued Interest with Treasury                                                                1                    2
    Other                                                                                                   -                    2
       Total Components Requiring or Generating Resources in Future
       Periods                                                                                       (26,887)              (5,097)
    Total Components That Will Not Require or Generate Resources in the
    Current Period                                                                                   (10,176)               7,098


 Net Cost of Operations                                                                         $     73,425         $     83,170




FY 2015 Agency Financial Report—U.S. Department of Education                                                                     97
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS

Note 18. Incidental Custodial Collections
The Department administers certain activities associated with the collection of nonexchange
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 2015 and FY 2014, the Department
collected $1.1 million and $2.0 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 2015 or 2014 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 2015, the Department provided funding of 83.0 percent of the capital
used to make loans to eligible students through participating schools at 5 percent interest. The
schools provided the remaining 17.0 percent of program funding. For the latest academic year
that ended June 30, 2015, approximately 527 thousand loans were made totaling $1.2 billion at
1,474 institutions, making an average of $2,197 per loan. The Department’s equity interest was
approximately $6.7 billion as of June 30, 2015.
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.
The Federal Perkins Loan program officially ended on September 30, 2015. However, if
schools made the first disbursement of a Federal Perkins Loan to a student for the 2015–16
award year prior to October 1, 2015, the school may make any remaining disbursements of that
2015–16 loan after September 30, 2015. In addition, there is a narrow “grandfathering”
provision that allows schools to make Federal Perkins Loans to certain students for up to five
additional years (through September 30, 2020) to enable students who received loans for
award years that end prior to October 1, 2015 to continue or complete courses of study.
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.



98                                                       FY 2015 Agency Financial Report—U.S. Department of Education
FY 2015 Agency Financial Report—U.S. Department of Education




                                                                                                                                                                                           United States Department of Education
                                                                                                                                                                                        Combining Statement of Budgetary Resources
                                                                                                                                                                                          For the Year Ended September 30, 2015




                                                                                                            99
                                                                                                                                                                                                                    (Dollars in Millions)

                                                                                                                                                                                                                                                                                       Office of         Office of Special
                                                                                                                                                                                                                                                                                   Elementary and         Education and
                                                                                                                                                                                                                                                                                     Secondary            Rehabilitative
                                                                                                                                                                                                Combined                                    Federal Student Aid                       Education              Services                         Other

                                                                                                       FY 2006 Performance and Accountability Report—U.S. Department of Education                             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                                                                     $          14,837 $               10,109 $               12,642 $               9,857 $                    836 $                   309 $            1,050 $                   252
                                                                Recoveries of Prior Year Unpaid Obligations                                                                                     1,978                 20,727                    921                20,727                      643                     271                143                        -
                                                                Other Changes in Unobligated Balance (+ or -)                                                                                    (681)               (24,526)                  (196)              (24,520)                    (210)                   (140)              (135)                     (6)
                                                                Unobligated Balance from Prior Year Budget Authority, Net                                                           $          16,134 $                6,310 $               13,367 $               6,064 $                  1,269 $                   440 $            1,058 $                   246
                                                                Appropriations (Discretionary and Mandatory)                                                                                  100,701                    904                 55,798                   904                   21,575                  16,201              7,127                        -
                                                                Borrowing Authority (Discretionary and Mandatory) (Note 16)                                                                          -               171,807                       -              171,624                         -                       -                  -                    183
                                                                Spending Authority from Offsetting Collections (Discretionary and Mandatory)                                                      383                 53,439                    504                53,365                        3                    (184)                60                      74
                                                               Total Budgetary Resources (Note 16)                                                                                  $        117,218 $               232,460 $               69,669 $             231,957 $                 22,847 $                16,457 $            8,245 $                   503
                                                               Status of Budgetary Resources:
                                                                Obligations Incurred (Note 16)                                                                                      $        102,444      $          218,023      $          56,950    $          217,721      $            22,047      $           16,184   $          7,263      $              302
                                                                Unobligated Balance, End of Year:
                                                                 Apportioned                                                                                                                  11,806                     550                 10,473                   550                        677                     33                  623                    -
                                                                 Unapportioned                                                                                                                 2,968                  13,887                  2,246                13,686                        123                    240                  359                  201
                                                                Total Unobligated Balance, End of Year                                                                              $         14,774 $                14,437 $               12,719 $              14,236 $                      800 $                  273 $                982 $                201
                                                               Total Status of Budgetary Resources (Note 16)                                                                        $        117,218 $               232,460 $               69,669 $             231,957 $                 22,847 $                16,457 $            8,245 $                   503
                                                               Change in Obligated Balance:
                                                                Unpaid Obligations
                                                                 Unpaid Obligations, Brought Forward, October 1                                                                     $          56,219 $               80,316 $               21,466 $               80,104 $                15,948 $               8,921   $            9,884 $                   212
                                                                 Obligations Incurred                                                                                                         102,444                218,023                 56,950                217,721                  22,047                16,184                7,263                     302
                                                                 Outlays (Gross) (-)                                                                                                         (103,847)              (199,496)               (58,209)              (199,218)                (22,402)              (15,806)              (7,430)                   (278)




                                                                                                                                                                                                                                                                                                                                                                           REQUIRED SUPPLEMENTARY INFORMATION
                                                                 Actual Transfers, Unpaid Obligations (net) (+ o -)                                                                              (193)                      -                      -                      -                      -                  (193)                    -                       -
                                                                 Recoveries of Prior Year Unpaid Obligations (-)                                                                               (1,978)               (20,727)                  (921)               (20,727)                   (643)                 (271)                (143)                       -
                                                                 Unpaid Obligations, End of Year                                                                                    $          52,645 $               78,116 $               19,286 $               77,880 $                14,950 $                 8,835 $            9,574 $                   236
                                                                Uncollected Payments
                                                                 Uncollected Payments, Federal Sources, Brought Forward, October 1 (-)                                              $               (1) $                 (26) $                   -   $               (4) $                        -   $                -   $               (1) $                (22)
                                                                 Change in Uncollected Payments, Federal Sources (+ or -)                                                                           (2)                     -                      -                    -                           -                    -                   (2)                     -
                                                                 Uncollected Payments, Federal Sources, End of Year (-)                                                             $               (3) $                 (26) $                   -   $               (4) $                        -   $                -   $               (3) $                (22)
                                                                Memorandum (non-add) Entries
                                                                 Obligated Balance, Start of Year (+ or -)                                                                          $         56,218 $                80,290 $               21,466 $              80,100 $                 15,948 $                 8,921 $            9,883 $                   190
                                                                 Obligated Balance, End of Year (+ or -)                                                                            $         52,642 $                78,090 $               19,286 $              77,876 $                 14,950 $                 8,835 $            9,571 $                   214
                                                               Budget Authority and Outlays, Net:




                                                                                                                                                                                                                                                                                                                                                                                                                FINANCIAL SECTION
                                                                Budget Authority, Gross (Discretionary and Mandatory)                                                               $        101,084 $               226,150 $               56,302 $              225,893 $                21,578 $                16,017 $            7,187 $                   257
                                                                Actual Offsetting Collections (Discretionary and Mandatory) (-)                                                                 (713)               (122,387)                  (647)              (122,283)                      -                       -                (66)                   (104)
                                                                Change in Uncollected Customer Payments from Federal Sources
                                                                (Discretionary and Mandatory) (+ or -)                                                                                              (2)                       -                    -                       -                        -                    -                   (2)                       -
                                                                Budget Authority, Net (Discretionary and Mandatory)                                                                 $        100,369 $               103,763 $               55,655 $             103,610 $                 21,578 $                16,017 $            7,119 $                   153

                                                                Outlays, Gross (Discretionary and Mandatory)                                                                        $        103,847 $               199,496 $               58,209 $             199,218 $                 22,402 $                15,806 $            7,430 $                   278
                                                                Actual Offsetting Collections (Discretionary and Mandatory) (-)                                                                 (713)               (122,387)                  (647)              (122,283)                       -                       -               (66)                   (104)
                                                                Outlays, Net (Discretionary and Mandatory)                                                                                   103,134                  77,109                 57,562                76,935                   22,402                 15,806               7,364                     174
                                                                Distributed Offsetting Receipts (-) (Note 16)                                                                                (13,105)                      -                (12,957)                    -                        -                      -                (148)                      -
99




                                                                Agency Outlays, Net (Discretionary and Mandatory) (Note 16)                                                         $         90,029 $                77,109      $          44,605    $           76,935      $            22,402      $          15,806    $          7,216 $                   174
                                                                                                                                                                            United States Department of Education
                                                                                                                                                                         Combining Statement of Budgetary Resources
100




                                                                                                                                                                                                                                                                                                                                                REQUIRED SUPPLEMENTARY INFORMATION
                                                                                                                                                                                                                                                                                                                                                                                     FINANCIAL SECTION
                                                                                                                                                                           For the Year Ended September 30, 2014
                                                                                                                                                                                                          (Dollars in Millions)

                                                                                                                                                                                                                                                                Office of          Office of Special

                                                                                        100
                                                                                                                                                                                                                                                            Elementary and          Education and
                                                                                                                                                                                                                                                              Secondary             Rehabilitative
                                                                                                                                                                            Combined                                  Federal Student Aid                      Education               Services                      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             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
                                                                 Outlays (Gross) (-)                                                                                      (99,886)            (217,614)                 (53,339)              (217,404)             (23,101)                (16,072)            (7,374)                (210)
FY 2015 Agency Financial Report—U.S. Department of Education




                                                                 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:
                                                                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)                   -
                                                               Agency Outlays, Net (Discretionary and Mandatory) (Note 16)                                      $         59,610 $              120,151 $                13,238 $              120,029 $            23,101 $                 16,070 $           7,201 $                 122
                                                                             FINANCIAL SECTION



           Required Supplementary Stewardship Information
The Office of Management and Budget requires each federal agency to report on its
stewardship over various resources entrusted to it and certain responsibilities assumed by it
which cannot be measured and conveyed through traditional financial reports. These
elements do not meet the criteria for assets and liabilities required in the preparation of the
Department’s financial statements and accompanying footnotes, but are nonetheless
important to understanding the agency’s financial condition, strategic goals, and related
program outcomes.

Stewardship Expenses

Stewardship expenses are substantial investments made 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
Required Supplementary Stewardship Information to highlight their benefit and to
demonstrate accountability for their use.

In the United States, the structure of education finance is such that state and local
governments play a much greater overall role than the federal government. Of the
estimated more than $1 trillion spent nationally on all levels of education, the majority of
funding comes from state, local, and private sources. In the area of elementary and
secondary education, nearly 90 percent of resources come from nonfederal sources. These
funds serve over 50 million students enrolled in public, private, and charter schools in the
United States and its territories, according to the National Center for Education Statistics
(NCES). See the NCES Condition of Education Annual Report for more information.

With its relatively small role in total education funding, the Department strives to create the
greatest number of favorable program outcomes with a limited amount of taxpayer-provided
resources. This is accomplished by targeting areas in which funds will go the furthest in
doing the most good. Namely, federal funding is used to provide grant, loan, loan
forgiveness, loan exit counseling, work-study, and other assistance to more than 20 million
postsecondary students. During FY 2015, the majority of the Department’s $303 billion in
gross outlays were attributable to Direct Loan disbursements administered by Federal
Student Aid. Grant-based activity under discretionary, formula, and need-based formats
accounted for the remainder of the outlays.

Discretionary grants, such as TRIO 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, and
    published selection criteria established for individual programs.

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, as often as annually, on a
formula basis, and:

    provide funds as dictated by a law, and
    allocate funds to districts on a per-student basis.



FY 2015 Agency Financial Report—U.S. Department of Education                                101
FINANCIAL SECTION
REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION

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 and discretionary assets,
     expected family contribution (EFC), and
     dependency status of the student and other members of their family.

Further details on financial figures and program-level goals can be viewed in the
Department’s 2015 Budget Summary.

Investment in Human Capital

Human capital investments are defined similarly by OMB, in Circular A-136, and the
Statement of Federal Financial Accounting Standards (SFFAS) No. 8, Supplementary
Stewardship Reporting. These investments are expenses included in net cost for education
and training programs intended to increase or maintain national economic productive
capacity; and produce outputs and outcomes that provide evidence of maintaining or
increasing national productive capacity.

Departmentwide strategic goals are formed around the agency mission of promoting
student achievement and preparation for global competitiveness by fostering educational
excellence and ensuring equal access. The Department drives toward accomplishing this
mission by establishing priority areas. For 2015, the following six elements of focus were
enumerated in the Department’s Budget Request:

(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.

Supplementing state and local government funding, the Department utilizes its annual
appropriations and outlay authority to foster human capital improvements across the nation
by supporting programs along the entire spectrum of “cradle to career” education. Direct
loans, guaranteed loans, grants, and technical program assistance are administered and
monitored by the Office of Federal Student Aid and numerous other program-aimed
components of the Department. The Institute of Education Sciences is the independent
nonpartisan research arm of the Department that aims to present scientific evidence on
which to ground education practice and policy while providing useful information to all
stakeholders in the arena of American education. Further details of each office and their
work can be viewed on the Department’s Coordinating Structure website.

The following table illustrates the Department’s expenses paid for bolstering the nation’s
human capital, broken out by the nature of the expense, for the last five years.




102                                                   FY 2015 Agency Financial Report—U.S. Department of Education
                                                                                               FINANCIAL SECTION
                                                                  REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION


                                    Summary of Human Capital Expenses
                                                        (Dollars in Millions)


                                                        2015               2014           2013            2012           2011

Federal Student Aid Expense
 Direct Loan Subsidy                               $           (892)   $    8,126     $ (39,557)     $ (10,720)      $ (28,630)

 Federal Family Education Loan                           (3,856)           (6,585)         (8,753)        (14,381)       (16,126)
 Program Subsidy
 Perkins Loans, Pell and Other Grants                     31,400           33,098          33,542          34,310         39,008
 Salaries and Administrative                                 242              206             222             192            193
   Subtotal                                               26,894           34,845         (14,546)          9,401         (5,555)
Other Departmental

 Elementary and Secondary Education                       22,146           22,832          22,221          22,137         21,195

  Special Education and Rehabilitative
                                                          15,751           15,948          15,919          16,139         15,357
  Services

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

 Other Departmental Programs                               6,494            6,938           6,175           6,211          7,341

 Salaries and Administrative                                    511           667             703             481            504

   Subtotal                                               44,902           46,385          47,641          52,619         72,342
Grand Total                                        $      71,796       $   81,230     $    33,095     $    62,020    $    66,787




Further detail regarding the nature of expenses and the recipient(s) of payments can be
seen in the Department’s financial statement footnotes (starting on page 60) and at the
Department’s USA Spending Agency Profile Page.

Program Outcomes

Favorable results in the various programs administered by the Department can be
interpreted in many ways. The “cradle to career” analogy in education culminates with the
successful completion of academic programs and the receipt of a degree. Accordingly, the
effectiveness of the Department’s investments in human capital can be gauged by changes
in the amount of students who fully complete the requirements for earning a bachelor’s or
associate’s degree. This often final stepping stone in one’s educational career correlates
strongly with wage and/or salary increases for a person, due to the high-level skills
expected by employers of graduates entering the labor force. Attaining a degree has proven
to increase an individual’s job opportunity outlook for life, making them less susceptible to
general economic downturns and allowing them to afford living expenses more comfortably;
make debt payments, including student loans; and avoid delinquency and credit problems.
Increased employability makes Americans more competitive in the global labor market,
yielding lower unemployment, higher economic well-being, and greater national security.




FY 2015 Agency Financial Report—U.S. Department of Education                                                                  103
FINANCIAL SECTION
REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION

Specific data on unemployment and median incomes in the United States released by the
Department of Labor for Fiscal Year 2015 are displayed in the graphs below. Individuals
with lower levels of education attained were unemployed at a higher rate. As of
September 30, 2015, individuals who had not completed high school were unemployed at a
rate of 7.9 percent, as compared to 5.2 percent for those who completed high school and
2.5 percent for those individuals who had completed a bachelor’s degree or higher.




Annualized data on employed individuals’ incomes show that career advancement trends
are consistent for both men and women when accounting for whether an individual has a
college education or a high school education. Men with high school diplomas earned an
average of $39,156 annually, as compared to $73,532 for men who had completed a
college degree. Similarly, women with high school diplomas earned $30,576, while college
graduates earned $55,328. For further details, visit the Bureau of Labor Statistics.




Nationally, progress is being made from early education, through the time college
graduates enter the workforce, and even after—when they are repaying student loan debt
incurred for postsecondary education. Broad improvements to the system increase
equitable opportunities for every child to have the privilege to learn, develop life skills, and
succeed over the course of their adult life. This undoubtedly moves the nation forward.




104                                                    FY 2015 Agency Financial Report—U.S. Department of Education
                                                                                            FINANCIAL SECTION
                                                               REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION

Since the year 2000, the number of school-age children living in poverty has decreased by
29 percent. Additionally, more than 65 percent of children 3–5 years old attend preschool—
a share that has risen steadily. Successful outcomes like these in early-focus areas lead to
rising cohorts of elementary school students who continue to outperform their predecessor
classes. This is shown in the fact that 4th and 8th grade metrics for aptitude tests in math
and reading, presented by the National Assessment of Educational Progress, are at their
highest ever.

At the secondary level, the number of students graduating or completely fulfilling general
education requirements continues to rise each year. Increases are also taking place for all
levels of postsecondary degrees. Recent data shows that 91 percent of young adults aged
25–29 have a high school diploma or equivalent, 45 percent have an associate’s degree,
and 34 percent have a bachelor’s degree or higher. For the same age range, expanded to
include those up to 34 years old, earnings were higher and unemployment was generally
lower for each increased level of education.

The accessibility and equity facets of the nation’s education system are at the heart of the
Department’s mission and are implied elements of all six goals of the 2014–2018 Strategic
Plan. High school graduation and drop out statistics continue to rise and fall, respectively, in
general. For FY 2015, graduation rates reached an all-time high of 81.4 percent, meaning
the Department has continued to make progress toward meeting the President’s 2020 goal
of 90 percent on-time graduations. More notably in the area of access and equity,
demographic statistics show that the on-time rate increases for Black, Hispanic, and Native
American students were around or above 4 percent.

With increased completion of high school diplomas, participation in some form of
postsecondary education has also risen. In the 2013 cohort of students graduating from
high school, for example, 66 percent enrolled in college the following fall. Participation in
postsecondary programs is particularly higher for Black and Hispanic students, who have
shown a combined increase of 1.1 million students since 2008.

In that student loan disbursements for college degrees make up the largest component of
the Department’s investment in American human capital, the Department assumes the
implied responsibility for ensuring the sustainability of its major loan programs. Moreover, if
college-bound students incur debt to earn a degree and then fail to get a job or afford their
student loan payments, the Department would be falling short of its fourth strategic focus
centered around the affordability of postsecondary education.

One important method used in the area of analyzing student loan programs, borrower
activity, and institution participation is the monitoring of default statistics. Each year,
substantial stewardship expenses incurred by the Department are aimed at lowering the
number of defaulted loans, defaulted borrowers, and disbursed dollars going into default.
This is done because every default—when a loan payment is missed for multiple months—
results in loan funds that are not replenished, missed opportunities to invest in other
degree-seeking human capital, and additional resources used by the government in
attempting to collect its money. Each aspect of a default costs American taxpayers, affects
the federal budget, decreases economic well-being, and harms borrowers’ credit scores.

Although a direct and proven linkage does not exist between the two variables, the
Department feels strongly about its ability to mitigate the risk of default through various
efforts. Stewardship expenses for this postsecondary goal include those incurred to
increase borrower awareness of repayment options, encouraging third-party loan servicers



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to work more effectively in helping students avoid default by devising viable repayment
plans, and by working with financial aid offices around the country to help them improve the
loan counseling provided to students who have yet to graduate or enter repayment.

Default statistics for the FY 2012 cohort of borrowers entering repayment were released at
the end of FY 2015. Of the 5.1 million borrowers entering repayment from October 1, 2011
to September 30, 2012, 611,000 defaulted on their loan before September 30, 2014. This
default rate of 11.8 percent across all institution types showed a decline from the prior year
rate of 12.9 percent for the 2011 cohort. It is important to note that this metric is unadjusted
for loan program facets, such as consolidations and forbearance.

Trends in default rates, among other indicating metrics monitored at the Department,
continue to support proof of favorable outcomes within programs at all levels. The figures
also effectively convey the synergetic nature of the Department’s mission for improving one
of the most important building blocks of the nation’s infrastructure. Individual achievements
fostered by the Department’s investments in human capital and supporting stewardship
expenses as far back as “the cradle” continue to build a powerful foundation for career
success and advancement of the nation, in and of itself, and against global competitors.




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Other Information
OTHER INFORMATION



                    About the Other Information Section
This section includes improper payments reporting details, the schedule of spending, a
summary of assurances, a summary of the Office of Inspector General’s view on the
Department’s management and performance challenges for FY 2016, freeze the footprint
information, and civil monetary penalty inflation adjustment information.

Improper Payments Reporting Details

The Improper Payments Reporting Details summarizes the Department’s efforts to prevent,
identify, and recover improper payments. It includes data regarding the Department’s high
risk programs, including assessments of risk, estimates of improper payments, actions to
mitigate improper payments, and recoveries of improper payments. Two new subsections
have been incorporated based on the FY 2015 update to OMB Circular A-136, Financial
Reporting Requirements: 1) The Improper Payment Root Cause Categories subsection
provides a matrix showing estimated dollar amounts for each program deemed susceptible
to significant improper payments, and 2) the Internal Control over Payments subsection
provides additional details about our internal controls over improper payments.

Combined Schedule of Spending

The Schedule of Spending (SOS) presents: (a) what money was available to the
Department 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 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. The Department reported no material weaknesses in
FY 2015.

Office of Inspector General’s Management and Performance
Challenges

The Office of Inspector General’s (OIG) Management and Performance Challenges for
Fiscal Year 2016 report is summarized in this section. The OIG identified the following five
challenges: (1) Improper Payments, (2) Information Technology Security, (3) Oversight and
Monitoring, (4) Data Quality and Reporting, and (5) Information Technology System
Development and Implementation. The full report is available at the OIG website.

Freeze the Footprint

The Freeze the Footprint summarizes the Department’s efforts to comply with OMB
Management Procedures Memorandum 2013-02, the Freeze the Footprint policy
implementing guidance. That guidance directs 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.




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                          Improper Payments Reporting Details
The Office of Management and Budget’s (OMB) Circular A-123, Appendix C, Requirements
for Effective Estimation and Remediation of Improper Payments, implements the provisions
of the Improper Payments Information Act of 2002 (IPIA), 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), and directs federal agencies
to review and assess all programs and activities they administer and identify those
determined to be susceptible to significant improper payments. Significant improper
payments are defined as those in any particular program that exceed both 1.5 percent of
program payments and $10 million annually or that exceed $100 million.

In FY 2015, the Department determined that the Pell Grant and Direct Loan programs were
susceptible to significant improper payments risk. Details on improper payment estimates
and reduction targets for both programs are included within the Improper Payment
Reporting subsection.

As described in the Analysis of Systems, Controls, and Legal Compliance section, the
Office of Inspector General (OIG) reported that the Department was not compliant with
IPERA because it did not meet the FY 2014 annual reduction target for the Direct Loan
program that was published in the FY 2013 AFR. The full report, including the Department’s
response, is available for review at the OIG website. The Department submitted a plan to
Congress on August 11, 2015, describing the corrective actions the agency will take to
address OIG’s findings and become complaint with IPERA.

Risk Assessment

As required by OMB A-123, Appendix C, the Department assesses the risk of improper
payments at least once every three years for each program that is not already reporting an
improper payments estimate. A summary of this assessment is presented in the Risk
Assessment Results table below.

                                                    Risk Assessment Results
                                                                               Last Risk        Risk-
                                       Program
                                                                              Assessment     Susceptible?
   FSA Managed Programs
     Federal Pell Grant                                                        FY 2014           Yes
     The Teacher Education Assistance for College and Higher
                                                                               FY 2014           No
     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




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    Risk Assessment Results
                                                                             Last Risk Risk-
                                Program
                                                                            Assessment Susceptible?
      Federal Direct Loan Program                                              FY 2014                     Yes
                                                                                                               (1)
      Federal Family Education Loan Program                                    FY 2014                     No
      Federal Work-Study Program                                               FY 2014                     No
      Health Education Assistance Loan Program                                 FY 2015                     No(2)
    Other Department Programs
                                                                                                               (3)
      Title I                                                                  FY 2013                    No
      Other Grant Programs                                                     FY 2013                    No
      Contract Payments                                                        FY 2013                    No
      Administrative Payments                                                  FY 2014                    No
       (1) The  Federal Family Education Loan (FFEL) program was formally reclassified in FY 2015 as no
       longer susceptible to significant improper payments.
       (2) On July 1, 2014, the Health Education Assistance Loan (HEAL) program was transferred from the U.S.

       Department of Health and Human Services (HHS) to the Department. As a result, an additional FSA-
       managed program was identified for FY 2015. However, based on the results of the risk assessment, the
       HEAL program was determined not to be susceptible to significant improper payments.
       (3) Title I is included in the Risk Assessment Results table because it is a Section 57 program. OMB A-11,

       dated 2002, Section 57, Exhibit 57B requires agencies to report on programs deemed at risk for erroneous
       payments. Further reporting on this program is contained in Tables 1 and 4.

FSA-Managed Programs

For all FSA-managed programs, risk assessment meetings were held with program owners,
key personnel, and other designees to discuss the inherent risk of improper payments
according to the following 10 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.

Process owners assigned a risk rating to each risk factor based on their detailed
understanding of the processes and risk of improper payment. Weighted percentages were
assigned to each risk factor rating based on a judgmental determination of the direct or
indirect impact on improper payments. An overall risk score was then computed for each


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program, calculated by the sum of the weighted scores for each risk factor and overall
rating scale. Based on risk assessments conducted in FY 2014, the Department determined
that the Pell Grant and Direct Loan programs were susceptible to risk of significant
improper payments.

According to OMB Circular A-123, Appendix C, if a program has previously been identified
as susceptible to improper payments, but has documented at least two consecutive years
of improper payments that are below the IPERA threshold, the agency may request relief
from the annual reporting requirement for this program. The Federal Family Education Loan
(FFEL) program reported improper payment estimates below the statutory threshold during
FY 2013 and FY 2014. On August 4, 2015, OMB approved the Department’s request, with
OIG’s concurrence, for relief from improper payments reporting for the FFEL program.
Accordingly, the Department has formally reclassified the FFEL program as not susceptible
to significant improper payments.

Other Department Programs

The Department performed a risk assessment for all other grant programs during FY 2013
using the methodology described in the FY 2011 AFR, pages 114–115. This methodology
relies on an examination of the total questioned costs for each program that result from
required OMB Circular A-133 Single Audits. The Department’s FY 2013 assessment
determined that none of the other grant programs were susceptible to significant improper
payments. The specific grant programs reviewed are provided at the Department’s website.
During FY 2013, the Department also completed a risk assessment of contract payments,
including those made by FSA, and determined that contract payments were not susceptible
to significant improper payments.

In 2014, the Department completed a risk assessment on administrative payments to
employees in accordance with IPERIA. The areas of administrative payments that were
examined include: Salary/Locality Pay, Travel, Purchase Cards, and Transit Benefits. The
analysis was based on a review of actual recaptured payments versus total outlay for each
of the related payment areas and the likelihood of payment errors. The Department
determined that administrative payments to employees were not susceptible to significant
improper payments.

Improper Payment Estimation Methodology

On September 17, 2014, the Department obtained approval from OMB to use an alternative
methodology for estimating improper payments for the Pell Grant and Direct Loan
programs. The alternative methodology 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 alternative methodology, although it does not use statistical
sampling techniques, provides for a more efficient allocation of resources by integrating
the estimation methodology into core FSA monitoring functions. The methodology is
described in detail on the Department’s improper payments website.

On June 30, 2015, the Department submitted updates to the alternative sampling plan and
estimation methodology to OMB for approval in response to findings from the OIG’s
FY 2014 IPERA compliance audit report, U.S. Department of Education’s Compliance With



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IMPROPER PAYMENTS REPORTING DETAILS

Improper Payment Reporting Requirements for Fiscal Year 2014. Updates included
clarification of sample sizes, updates to formulas, citations and references, and inclusion of
justification for use of the alternative methodology. OMB approved the Department’s
updates to the alternative sampling plan and estimation methodology on October 20, 2015.

During FY 2015, the Pell Grant and Direct Loan programs continued to be susceptible to
significant improper payments.

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

The Department estimates improper payments for Title I using questioned cost data in audit
reports. This methodology is described in the FY 2012 AFR. The Department’s risk
assessment has not identified Title I as a program susceptible to significant improper
payments. Title I is included in this section because it is a Section 57 program.




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                                                               Improper Payment Reporting

                                                                                                                                                 Table 1. Improper Payment Reduction Outlook
                                                                                                                                                                                        ($ in millions)




                                                                                                                                                                                                                                 CY + 1 Est. IP %




                                                                                                                                                                                                                                                                                       CY + 2 Est. IP %




                                                                                                                                                                                                                                                                                                                                                CY + 3 Est. IP %
                                                                                                                                                                                                                                                     CY + 1 Est. IP $




                                                                                                                                                                                                                                                                                                             CY + 2 Est. IP $




                                                                                                                                                                                                                                                                                                                                                                      CY + 3 Est. IP $
                                                                                                                                    CY Outlays (3)
                                                                                  PY Outlays (1)




                                                                                                                                                                                                                   CY + 1 Est.




                                                                                                                                                                                                                                                                         CY + 2 Est.




                                                                                                                                                                                                                                                                                                                                  CY + 3 Est.
                                                                                                                                                                                         payment $


                                                                                                                                                                                                     payment $
                                                                                                                                                                                                     CY Under-
                                                                                                                                                     CY IP % (4)
                                                                                                   PY IP % (2)




                                                                                                                                                                                                                   Outlays (5)




                                                                                                                                                                                                                                                                         Outlays (5)




                                                                                                                                                                                                                                                                                                                                  Outlays (5)
                                                                                                                                                                    CY IP $ (4)
                                                                                                                   PY IP $ (2)




                                                                                                                                                                                         CY Over-
                                                               Program
                                                                  or
                                                               Activity
                                                               Pell Grant       31,554.13          2.16           681.57         29,909.28 1.88                      562.29              457.59      104.70       31,013.00      1.87               579.94              31,664.00      1.86                588.95                32,504.00      1.85                601.32

                                                               Direct Loan     102,140.49          1.50          1,532.10        98,771.65 1.30                    1,284.03             1,122.51     161.52      104,707.00      1.29 1,350.72 109,802.00                              1.29               1,416.44              115,163.00      1.28               1,474.08
                                                                         (6)
                                                               Title I          16,372.00          .214            35.03         15,715.00 .127                          19.95            19.95         0.00      16,444.00      .127                20.88              15,294.00      .127                 19.42                16,411.00      .127                 20.84
                                                               Federal
                                                               Family
                                                                                10,016.31          0.00                0.00                    N/A   N/A                          N/A        N/A        N/A               N/A     N/A                     N/A                   N/A     N/A                           N/A                 N/A    N/A                         N/A
                                                               Education
                                                               Loan (7)
                                                                   TOTAL (8)   160,082.93          1.40          2,248.70 144,395.93 1.29                          1,866.27             1,600.05     266.22      152,164.00      1.28 1,951.54 156,760.00                              1.29               2,024.81              164,078.00      1.28               2,096.24
                                                                   (1) The source of FY 2014 outlays for all programs is FMS as presented in the FY 2014 AFR.
                                                                   (2) The PY improper payment estimates reported in the table above reflect the improper payment estimates for FY 2014 as reported in the FY 2014 AFR.




                                                                                                                                                                                                                                                                                                                                                                                         IMPROPER PAYMENTS REPORTING DETAILS
                                                                   FSA has published recalculated FY 2014 improper payment rates in response to the FY14 IPERA Compliance Audit Report published by OIG on May 15,
                                                                   2015. The updated improper payment rates are prepared in accordance with OMB-approved methodologies and correct for data, calculation, and estimation
                                                                   methodologies errors. The estimated improper payment rate and improper payment total for the Direct Loan program as recalculated are 1.46% and $1,491
                                                                   million, respectively. The estimated improper payment rate and improper payment total for the Pell Grant program as recalculated are 2.21% and $697
                                                                   million, respectively. These estimates are reported using the alternative sampling and estimation methodology approved as of April 3, 2015.
                                                                   (3) The source of FY 2015 outlays for all program amounts is FMS.
                                                                   (4) In FY 2015, the Pell and Direct Loan program improper payment estimates are reported using the updated methodology. OMB approved the Department’s

                                                                   updates to the alternative sampling plan and estimation methodology on October 20, 2015. The FY 2015 rates are based on program reviews performed in




                                                                                                                                                                                                                                                                                                                                                                                                                               OTHER INFORMATION
                                                                   FY 2014 for award year 2012–2013 data.
                                                                   (5) The source of FY 2016–2018 Pell, Direct Loan, and Title I outlay amounts is the FY 2016 President’s Budget at the Mid-Session Review.
                                                                   (6) Title I is included in this table because it is a Section 57 program. OMB A-11, dated 2002, Section 57, Exhibit 57B requires agencies to report on

                                                                   programs deemed at risk for erroneous payments.
                                                                   (7) The Federal Family Education Loan (FFEL) program was granted a relief from reporting from OMB on August 4, 2015.
                                                                   (8) The total of the estimates for the agency does not represent a true statistical estimate for the agency.
129
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High-Priority Programs

In FY 2011, OMB designated the Pell Grant program a high-priority program, because
estimated FY 2010 Pell Grant 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. On
February 4, 2015, OMB also designated the Direct Loan program as a High Priority program
as estimated improper payments of $1,532 million in FY 2014 exceeded the statutory
$750 million threshold.

Under the Executive Order 13520, agencies with high-priority programs shall establish annual
or semi-annual measurements or actions for reducing improper payments. The Department
submitted supplemental measures for the Pell Grant and Direct Loan programs to OMB to be
approved for FY 2015 reporting. OMB granted approval on October 3, 2015.

The supplemental measure for the Pell Grant program is based on the total number of Pell-
eligible applicants who transferred tax data from the IRS to their Free Application for Federal
Student Aid (FAFSA) as a percentage of the total number of Pell-eligible applicants who were
determined to be eligible to use the Internal Revenue Service Data Retrieval Tool (IRS DRT)
to transfer tax data. The rate for this measure for award year 2014–15 is 65.92 percent and
the target for award year 2015–16 is 69.42 percent. This supplemental measure will be
reported annually on PaymentAccuracy.gov.

For the Direct Loan program, a similar supplemental measure is in place based on the total
number of Direct Loan recipients who transferred tax data from the IRS to the FAFSA as a
percentage of the total number of Direct Loan recipients who were determined to be eligible to
use the IRS DRT to transfer tax data. The rate for this measure for award year 2014–15 is
45.46 percent and the target for award year 2015–16 is 48.14 percent. This supplemental
measure will be reported annually on PaymentAccuracy.gov.

Use of the IRS DRT to directly transfer tax information from IRS to the online FAFSA verifies
applicants’ income, and as applicable their parents’ income to determine how much aid they
are eligible to receive. Errors in income on an application is one of the most prevalent root
causes of improper payments for both the Direct Loan and Pell Grant programs; transferring
tax data to the FAFSA with the IRS DRT helps ensure that the income is more accurate and
therefore reduces the likelihood of an improper payment being made.

Measures to Ensure Program Access

FSA is committed to ensuring program access and providing federal student aid to all eligible
students pursuing postsecondary education. The IRS DRT supports access to aid programs
by allowing students to transfer tax data directly from the IRS to the online FAFSA and
lessens the burden of income verification. 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 partnership alliance
between FSA and the IRS. The partnership focuses on reaching more individuals in low- to



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                                                               IMPROPER PAYMENTS REPORTING DETAILS

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 and create opportunities for increased access to the
FAFSA.

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 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.

In March 2014, the Department launched 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. The 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.

Improper Payment Root Cause Categories

Our analysis indicated that the underlying root cause of improper payments for the Pell
Grant and Direct Loan program in FY 2015 was failure to verify financial data and
administrative or process errors made by other parties. The root causes were identified
through improper payment testing and categorized using categories of error as defined in
the October 2014 update to OMB Circular A-123, Appendix C (OMB Memorandum
M-15-02). Specific root causes associated with the “Failure to Verify – Financial Data”
category include, but are not limited to, ineligibility for a Pell Grant or Direct Loan and
incorrect self-reporting of an applicant’s income which leads to incorrect awards based on
Expected Family Contribution (EFC). Specific root causes associated with the
“Administrative or Process Errors Made by – Other Party” category include, but are not
limited to, incorrect processing of student data by institutions during normal operations;
student account data changes not applied or processed correctly; satisfactory academic
progress not achieved; incorrectly calculated return records by institutions returning Title IV
student aid funds; and processing errors at the servicer level. Table 2 below, Improper
Payment Root Cause Category Matrix, summarizes the root cause categories for the Pell
Grant and Direct Loan programs.

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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                        Table 2. Improper Payment Root Cause Category Matrix
                                            ($ in millions)
                                                   Direct Loan                  Pell                           Title I
        Reason for Improper
                                                 Over-     Under-      Over-            Under-       Over-            Under-
             Payment                           payments   payments   payments          payments    payments          payments

       Program Design or Structural
                                                                                                                                1
       Issue

       Inability to Authenticate Eligibility                                                                                    2

                            Death Data                                                                                          3

                            Financial
                                                152.90      59.98     38.89             44.21                                   4
                            Data
                            Excluded
                                                                                                                                5
       Failure to           Party Data
       Verify:
                            Prisoner Data                                                                                       6

                            Other
                            Eligibility                                                                                         7
                            Data (explain)

                            Federal
                                                                                                                                8
                            Agency
                            State or
                                                                                                                                9
                            Local Agency
                            Other Party
       Administrative       (e.g.,
       or Process           participating
       Error Made by:       lender, health
                            care provider,
                                                969.61     101.54     418.70            60.49                                   10
                            or any other
                            organization
                            administering
                            Federal
                            dollars)

       Medical Necessity                                                                                                        11

       Insufficient Documentation to
                                                                                                     19.95                      12
       Determine

       Other Reason (a) (explain)                                                                                               13

       Other Reason (b) (explain)                                                                                               13

                                   TOTAL       1,122.51    161.52     457.59            104.70      19.95(1)

           (1) Title
                 I is included in this table because it is a Section 57 program. With current documentation,
           the Department is unable to disaggregate the estimated overpayments due to system restraints.
           The Department is working on enhancements for future reporting.


Corrective Actions

This section presents the corrective actions for the Pell Grant and Direct Loan programs.
The corrective actions presented below are recommendations to the schools for findings that
resulted from FSA Program Reviews. The discussion below also includes other long-term
corrective actions applicable to these programs, such as the IRS DRT and verification.

As part of the Program Review process, FSA evaluates an institution’s compliance with
federal student aid requirements for institutional eligibility, financial responsibility, and
administrative capability. FSA also assesses liabilities for errors, identifies corrective actions,
and initiates referrals for sanctions if applicable. Final Program Review determinations
indicate the action(s) the institution is required to take in order to make the Title IV, HEAL
programs, or the recipients whole for any funds that were improperly managed and to
prevent the same problems from recurring. Overall, FSA requires 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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FSA also continues to utilize the 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 FAFSA.

For the 2017–18 award year, applicants will be able to complete their FAFSA using “prior-
prior year” tax data. This is in contrast with the current “prior year” process where many
applicants submit their FAFSAs before tax returns have been completed, resulting in the
need to estimate income and tax information that subsequently needs to be corrected once
the tax return is filed; or worse, waiting to complete their FAFSA until after the tax return has
been filed. Also, applicants will be able to initiate their application earlier in the 2017–18
award year. The start of the FAFSA cycle for 2017–18 will move up from January 1 to
October 1. Both of these changes will assist in preventing improper payments as the IRS
DRT is anticipated to be used more and there is more time for effective verification
procedures.

Additionally, FSA continues to enhance verification procedures and require selected schools
to verify specific information reported on the FAFSA by student aid applicants. These and
certain other ongoing corrective actions, such as system edits and compliance audits, are
described in the FY 2012 AFR.

Going forward, FSA will expand the use of data analytics to identify anomalies, trends, and
patterns in application and disbursement data to help identify potential risk factors that may
inform risk-based decisions regarding program oversight. FSA will further collaborate with
OIG to receive and analyze fraud referrals and to identify potential fraud indicators for
suspicious student activity. FSA has engaged contract support and is in the process of
establishing a fraud group to support OIG fraud referrals. The primary objective of initial
activities includes the intake, analysis, and disposition of referrals. FSA will use this analysis
to inform recommendations on data analytics and identify ways to improve controls.

Direct Loan Consolidations and Refunds

Improper payments identified through testing of Direct Loan Consolidations for FY 2014 were
remediated or are in the process of being remediated. For Direct Loan Consolidations and
Refunds determined to be improper payments during the current assessment year, FSA is
coordinating with the respective Title IV Additional Servicers (TIVAS) and Not-For-Profit
(NFP) servicers to develop and implement corrective action plans.

Internal Control over Payments

To minimize improper payments, the Department maintains strong internal controls
designed to prevent, detect, and recover improper payments. These controls are an
essential part of the Department’s internal control framework described in the Analysis of
Systems, Controls, and Legal Compliance section. The Department periodically assesses
the payment controls for design and operating effectiveness as part of the Department self-
assessments of internal controls. Key controls related to improper payments include: risk
assessments; financial, programmatic, and control risks evaluations; use of automated
systems to detect anomalies in payments; and grants management and audit resolution,
among others.




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FSA also has a robust and mature framework of internal control over payments which
includes assessment of disbursement processes over Pell Grant and Direct Loan programs.
Table 3 below summarizes FSA’s self-assessment on the status of its internal control over
payments for these programs.

                              Table 3. Status of Internal Controls
                                                                               Direct
                       Internal Control Standards          Pell Grant
                                                                               Loan
                      Control Environment                       4                4
                      Risk Assessment                           4                4
                      Control Activities                        3                3
                      Information and Communication             3                3
                      Monitoring                                3                3
                        Legend:
                        4 = Sufficient controls are in place to prevent IPs
                        3 = Controls are in place to prevent IPs but there is room for improvement
                        2 = Minimal controls are in place to prevent IPs
                        1 = Controls are not in place to prevent IPs

FSA leverages its OMB Circular A-123 Appendix A (A-123A) assessment to evaluate the
design and operating effectiveness of controls intended to prevent and detect improper
payments. FSA assesses these controls overall and by the internal control components
identified below:

     Control Environment. FSA has a robust entity-level controls framework that provides
      discipline and structure to help FSA achieve its objectives. Part of this framework is a
      governance structure that includes an Improper Payment Working Group, a body of
      accountable stakeholders that informs decisions related to improper payment
      requirements, estimation, and control.
     Risk Assessment. FSA uses a risk assessment approach to target high risk areas and
      focus resources. FSA’s Office of Program Compliance, School Eligibility Service Group
      performs annual risk assessments to inform decisions on where and how to target each
      year’s program reviews. As a function of its A-123 program, FSA performs annual risk
      assessment of business processes and systems, including Pell and Direct Loan
      payment processes, to determine where to focus control testing. FSA performs a
      qualitative risk assessment at least once every three years to identify FSA programs
      susceptible to significant improper payments.
     Control Activities. In FY 2015, FSA identified 292 controls related to improper
      payments prevention or detection through its A-123A assessment. As an example, FSA
      annually conducts approximately 300 Program Reviews of the approximately
      6,000 eligible schools to assess institutions’ compliance with Title IV regulations.
     Information and Communication. FSA’s internal control framework supports quality
      information management and communication. FSA has an incident reporting process to
      collect information such as high-dollar overpayment on a quarterly basis; reports an
      estimate of the annual amount and rate of improper payments for all programs and
      activities susceptible to significant improper payments; and provides guidance to third
      parties through Federal Register notices, Dear Colleague Letters, and the Information for
      Financial Aid Professionals (IFAP) website, among others.




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    Monitoring. FSA has a set of activities to monitor program performance, identify
     instances of improper payments, and promptly resolve findings of audits and other
     reviews related to improper payments. As an example, upon completion of Program
     Reviews, FSA monitors appropriate corrective action and resolution of improper
     payments.

As indicated above, the Department is committed to preventing improper payments with
front-end controls, and detecting and recovering them if they occur. The Department
continues 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.

Accountability

FSA and other Department offices, managers, and staff are held accountable for meeting
applicable improper payments reduction targets and 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.

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. Department and FSA contractors are held accountable through various contract
management and oversight activities and functions, control assessments, and audits.

Agency Information Systems and Other Infrastructure

Continuous Monitoring and Data Analytics

The Department has a Continuous Controls Monitoring System (CCMS) to help detect
improper payments. This system applies a series of integrity checks to the Department’s
grant (non-FSA) and administrative payments and flags anomalous transactions for
follow-up analysis. Examples of issues that can be detected include duplicate drawdown by
grantees, unusual refunds by grantees, bank information alteration, and outlier drawdown
amounts. The Department is implementing an upgrade to this system to expand the
transactions being evaluated, improve the relevance of the checks with improved
algorithms, and integrate new sources of comparative data. A key objective of this initiative
is development of predictive modeling to prevent improper payments to the maximum
degree possible.

Risk Management

The Department takes measures to prevent improper payments through the use of the
Decision Support System (DSS) to run Entity Risk Review (ERR) reports for non-FSA grant
awards. Using data drawn from the Federal Audit Clearinghouse, Dun & Bradstreet, the


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Department’s grant system, and Institutes of Higher Education (IHE) accreditation reporting,
this report identifies financial, programmatic, and controls risks posed by award to the
prospective grantee. Grant officers and awarding officials use the ERR reports in the
preaward stage of the grant process to assess grantees’ risk and assist in the determination
of special conditions for grant awards. They also apply these reports in devising monitoring
plans for the life of the grant, strengthening them as the Department’s first line of defense
against improper payments by grantees.

In FY 2015, the Department produced 261 reports assessing risk for 10,762 grant applicants
to support the Department’s award of 6,886 Discretionary awards. In total, 100 percent of all
discretionary new and continuation awards were assessed for risk prior to award in the
areas of: financial stability; adequacy of management systems to meet applicable standards;
performance history; and compliance with applicable laws and regulations, including those
related to Suspension and Debarment. This work successfully demonstrated the
Department’s early compliance with 2 C.F.R. Section 205, Federal Awarding Agency Review
of Risk Posed by Applicants.

Audit Follow-up

The Department gathers and manages thousands of audits of grantees in an Audit
Accountability and Resolution Tracking System (AARTS). AARTS data is analyzed to
determine trends in audit findings and resolution, allowing the Department to search for and
better understand commonalities. This effort is assisting the Department in reducing
improper payments by strengthening audit resolution and grants management.

Barriers

The Department believes that the high burden of proof requirements in the General
Education Provisions Act (GEPA) are a significant reason why the Department recovers
such a small percentage of the original questioned costs in 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. As it relates to FSA programs, the Department does not see significant barriers in
taking corrective action in reducing improper payments. A detailed discussion of program-
specific barriers can be found in the FY 2012 Report on the Department of Education’s
Payment Recapture Audits.

Recapture of Improper Payments Reporting

Agencies are required to conduct recovery audits for contract payments and programs that
expend $1 million or more annually if conducting such audits would be cost-effective. The
Department performed a cost-benefit analysis and determined that a payment recapture
audit program would not be cost-effective for FSA programs, other grant programs, and
contracts. OMB was notified on October 30, 2014,1 that it was not cost effective to conduct a
payment recapture audit and the programs/activities would be excluded from a payment

1 The Department initially submitted a payment recapture audit plan to OMB on January 14, 2011, and has
subsequently submitted its reports on an annual basis noting that it was not cost effective to conduct a payment
recapture audit program. Latest report was submitted to OMB on October 30, 2014.



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recapture audit program. OMB sent their concurrence to the Department on September 21,
2015. 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.

The Department identifies and recovers improper payments through sources other than
payment recapture audits. 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 management’s
decisions regarding funds to be returned to the Department, thereby delaying or decreasing
the amounts the Department is able to collect.

In addition, for the Pell Grant program, recoveries also occur when overpayments to
students are assigned to FSA for collection. Pell Grant amounts recovered through student
debt collection were approximately $10.3 million in FY 2015 and $13.7 million in 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.

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.

Table 4, Improper Payment Recaptures without Audit Programs, below provides estimates of
the amounts identified and recovered through Compliance Audits, OIG Audits, and Program
Reviews for FY 2015.




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                Table 4. Improper Payment Recaptures without Audit Programs(1)
                                        ($ in millions)
                      Overpayments Recaptured outside of Payment Recapture Audits

                                                                                                  Amount        Amount
                                     Program or Activity(2)
                                                                                                 Identified    Recaptured


FSA Programs                                                                                       111.700           12.891

Other ED Programs

 Office of Career, Technical, and Adult Education                                                          -            .002

 Office of Elementary and Secondary Education                                                         8.174             .688

 Office of Postsecondary Education                                                                     .638             .760

 Office of Special Education and Rehabilitative Services                                              1.078             .331

Consolidated Grants to the Outlying Areas, Recovery Act                                                    -            .018

                                                                                     TOTAL         121.590           14.690
      (1) The Department’s cost-benefit analysis determined that a payment recapture audit program would not be
      cost-effective for FSA programs, other grant programs, and contracts. As a result, OMB A-136 Guidance
      Table 5, Disposition of Funds Recaptured Through Payment Recapture Audits, and Table 6, Aging of
      Outstanding Overpayments Identified in the Payment Recapture Audits, have been omitted.
      (2) The Department is unable to show the breakdown of recoveries by program due to system restraints. The

      Department is working on enhancements for future reporting.

Additional Comments

No additional comments.




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 Agency Reduction of Improper Payments with the Do Not Pay
 Initiative

        Table 7. Results of the Do Not Pay Initiative in Preventing Improper Payments
                                         (in millions)
                     Number (#)                                                       Number (#) of    Dollars ($) of
                          of             Dollars ($) of                                  potential       potential
                                                                 Number Dollars ($)
                     payments             payments                                       improper        improper
                                                                  (#) of     of
                      reviewed           reviewed for                                   payments         payments
                                                                payments payments
                    for possible       possible improper                              reviewed and     reviewed and
                                                                 stopped  stopped
                      improper            payments                                     determined       determined
                     payments                                                           accurate(3)      accurate
Reviews with               1.3666              190,262.2941            0         0             .0019            .7289
the IPERIA
specified
databases(1)
Reviews with                 .0008                    44.0173          0         0            .0004          19.4275
databases
not listed in
IPERIA(2)
 (1) IPERIA databases used for payment screening include the Death Master File (DMF) and the System for Award
 Management (SAM).
 (2) Reviews with databases not listed in IPERIA include payments reviewed through the Department’s Continuous

 Controls Monitoring System (CCMS).
 (3) Payments requiring further review and identified as proper.



 The Department continues its efforts to prevent and detect improper payments via the Do
 Not Pay (DNP) Business Center portal as required by IPERIA. During FY 2015, 1.37 million
 payments, totaling $190,262.29 million, were reviewed for potential improper payments
 through the DNP portal. There were 750 payment matches with the Death Master File and
 1,116 matches with the System for Award Management. The Department validated that
 potential improper payments identified were adjudicated and reported to Treasury in a
 timely manner. The Department also reviewed 835 payments, totaling $44.02 million, for
 potential improper payments through the Continuous Controls Monitoring System. A total of
 2,701 payments, with and without IPERIA databases, were further reviewed and determined
 to be accurate.




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                                                             United States Department of Education
                                                                Combined Schedule of Spending
                                                       For the Years Ended September 30, 2015 and 2014
                                                                                             (Dollars in Millions)


                                                                                                                         FY 2015                                     FY 2014
                                                                                                                            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                                                                                            $      117,218       $       232,460        $     112,443           $    243,566
   Amount Available but Not Agreed to be Spent                                                                       (11,806)                 (550)             (12,125)                   (69)
   Amount Not Available to be Spent                                                                                   (2,968)              (13,887)              (2,712)               (10,040)
Total Amounts Agreed to be Spent                                                                              $      102,444       $       218,023        $      97,606           $     233,457

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                           $     25,249     $      198,431                                          $      18,835          $    216,506
   Grants                                                                               35,569                  -                                                 37,223                     -
   Personnel Compensation and Benefits                                                     273                  -                                                    270                     -
   Contractual Services                                                                  1,248              1,065                                                  1,205                 1,108
   Other 1/                                                                                 37                  -                                                     35                     -
   Total Program Spending                                                               62,376            199,496                                                 57,568               217,614
Improve Preparation for College and Career from Birth
Through 12th Grade, Especially for Children with High Needs
   Grants                                                                               22,322                  -                                                 23,032                     -
   Personnel Compensation and Benefits                                                      73                  -                                                     69                     -
   Contractual Services                                                                    106                  -                                                     96                     -
          1/
   Other                                                                                    15                  -                                                     12                     -
   Total Program Spending                                                               22,516                  -                                                 23,209                     -
Ensure Effective Educational Opportunities for All Students
   Grants                                                                               16,474                  -                                                 16,793                     -
   Personnel Compensation and Benefits                                                     148                  -                                                    162                     -
   Contractual Services                                                                     49                  -                                                     55                     -
   Other 1/                                                                                 23                  -                                                     23                     -
   Total Program Spending                                                               16,694                  -                                                 17,033                     -
Enhance the Education System’s Ability to Continuously Improve
   Grants                                                                                1,661                  -                                                    1,519                   -
   Personnel Compensation and Benefits                                                      94                  -                                                       91                   -
   Contractual Services                                                                    491                  -                                                      451                   -
   Other 1/                                                                                 15                  -                                                       15                   -
   Total Program Spending                                                                2,261                  -                                                    2,076                   -

Total Spending                                                                                                $      103,847       $       199,496        $        99,886         $    217,614
   Amounts Remaining to be Spent2/                                                                                    (1,403)               18,527                 (2,280)              15,843
Total Amounts Agreed to be Spent                                                                              $      102,444       $       218,023        $        97,606         $    233,457

Section III: Who Did the Money Go To?
This section identifies with whom the Department is spending money based on obligations incurred.
   Nonfederal Obligations                                                        $    101,977                                      $       218,023         $       97,101         $    233,457
   Federal Obligations                                                                     467                                                   -                    505                    -
Total Amounts Agreed to be Spent                                                 $    102,444                                      $       218,023         $       97,606         $    233,457

1/
     Other primarily consists of payments for rent, utilities, communication, 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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                                                               COMBINED SCHEDULE OF SPENDING

The combined schedule of spending presents an overview of how and where the
Department spent its funding. The budgetary information in this schedule is presented on a
combined basis and not a consolidated basis.

    The “what money is available to spend” section summarizes the resources that were
     available to spend during the fiscal year.
    The “how was the money spent” section summarizes the Department’s outlays for the
     fiscal year, categorized by the OMB budget object class definitions found in Circular
     A-11, “Preparation, Submission and Execution of the Budget,” and by payment types.
    The “who did the money go to” section summarizes the Department’s obligations by
     federal and nonfederal components.
    The total amount agreed to be spent in each section is equal to the obligations incurred
     shown on the combined statement of budgetary resources. Similar data are also
     submitted to USAspending.gov; however, the amounts will not reconcile primarily
     because reporting requirements differ, particularly for loan programs and for payroll and
     employee benefits.




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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 107 and the Department’s management assurances on pages 39–49.

                               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
 Nonconformances                                    New      Resolved      Consolidated         Reassessed
                                      Balance                                                                       Balance

 Total Nonconformances                    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 2016
                         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) 2016.

The FY 2016 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 recent OIG audit, inspection, and investigative work. A
summary of each management challenge area follows. This FY 2016 Management
Challenges Report is available at http://www2.ed.gov/about/offices/list/oig/management
challenges.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)
and the William D. Ford Federal Direct Loan (Direct Loan) 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
improper payments. In May 2015, we reported that the Department did not comply with the
Improper Payments Elimination and Recovery Act of 2010 because it did not meet the


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                                       OFFICE OF INSPECTOR GENERAL’S MANAGEMENT CHALLENGES FOR FY 2016

annual reduction target for the Direct Loan program. We have identified concerns in
numerous areas relating to improper payments, including the completeness, accuracy, and
reliability of improper payment estimates and methodologies and improper payments
involving grantees. Our semiannual reports to Congress from April 1, 2012, through March
31, 2015, included more than $1.4 million in questioned or unsupported costs from audit
reports and more than $36 million in restitution payments from our investigative activity.

Progress in Meeting the Challenge

In its response to our draft Management Challenges report, the Department stated that it
faces a significant challenge in striking the right balance between providing timely and
accurate payments to grant recipients and students while at the same time ensuring that its
policies and controls are not too costly and burdensome to the Department and fund
recipients. The Department stated that it continuously assesses its business processes and
controls to further enhance them, while striving to balance risks, costs, and benefits.

The Department stated that it has developed corrective actions in response to OIG
recommendations that are intended to improve the accuracy and completeness of its
improper payment estimates, provide more detailed reporting, and enhance its controls
over student aid payments. It routinely analyzes payment data and considers other factors,
such as OIG reports, to detect and recover improper payments that have occurred and to
help devise ways to further reduce the risk of improper payments. The Department further
stated that its primary strategy for minimizing improper payments is to implement front-end
controls that prevent improper payments from occurring before it disburses Federal funds.

The Department added that the office of Federal Student Aid (FSA) has continued its efforts
to catalog improper payment and fraud-related controls and to assess them for
effectiveness. Additionally, FSA has improved its coordination with the OIG on fraud
referrals, to include developing processes to analyze referrals and identify potential fraud
indicators for suspicious student activity. The Department added that FSA plans to build on
this collaboration with the OIG and establish a fraud group during FY 2016 to oversee its
intake, analysis, and disposition of fraud referrals.

What Needs to Be Done

The Department needs to continue to explore additional opportunities for preventing,
identifying, and recapturing improper payments. Overall, the Department needs to develop
estimation methodologies that improve the accuracy, completeness, and reliability of
improper payment estimations. 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 sensitive information such as personal
records, financial information, and other personally identifiable information. Without



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OFFICE OF INSPECTOR GENERAL’S MANAGEMENT CHALLENGES FOR FY 2016

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, remote access management, and contingency
planning. In addition, OIG investigative work has identified IT security control concerns in
areas such as the FSA personal identification number system.

Progress in Meeting the Challenge

The Department identified numerous activities intended to improve its IT security in its
response to our draft Management Challenges report. The Department stated that it
provided corrective action plans to address the recommendations in FY 2012, FY 2013, and
FY 2014 OIG audits. It further indicated it had completed actions designed to help address
this challenges that included the following:

     implementing a new Department-wide Security Operations Management system, to
      provide overall case management and Security Operations Center operations;
     implementing a solution to provide two-factor authentication for accessing email
      remotely from personal computers and mobile devices, replacing the username and
      password authentication method;
     implementing a new student identification system as part of FSA’s Enterprise Identity
      Management Program; and
     implementing the FSA Security Operations Center to strengthen FSA’s network and
      data security.

What Needs to Be Done

Overall, the Department needs to effectively address IT security deficiencies, continue to
provide mitigating controls for vulnerabilities, and implement planned actions to correct
system weaknesses.

The Department needs to develop more effective capabilities to respond to potential IT
security incidents. Although the Department and FSA have begun to implement their own
incident response teams and establish Security Operations Centers, this capability is still
being developed. The Department needs to continue to make progress within this area to
ensure the timeliness and effectiveness of its response processes.

While the Department has made process towards implementing its two-factor authentication
plans, it needs to continue its process of implementing and enforcing the use of two-factor
authentication for all Federal employees, contractors, and other authorized users.

Vulnerabilities continue to exist in the programs intended to identify and protect critical
technologies. The Department must continue to strive towards a robust capability to identify
and respond to malware installations or intruder activity.


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Management Challenge 3—Oversight and Monitoring

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

Oversight and Monitoring—SFA Program Participants

Why This Is a Challenge

The Department must provide effective oversight and monitoring of participants in the SFA
programs under Title IV of the Higher Education Act of 1965, as amended, to ensure that
the programs are not subject to fraud, waste, and abuse. During the 2014–2015 award
year, FSA provided about $169.6 billion in grants, loans, and work-study assistance to help
students pay for postsecondary education. The Department’s FY 2016 budget request
outlines $176.1 billion in Federal student aid, including $28.9 billion in Pell Grants and more
than $141.7 billion in student loans. More than 13.2 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

In its response to our draft Management Challenges report, the Department stated that it
has made significant progress in providing the public with information about financial
assistance options available for postsecondary education, while working at the same time
to manage the risks inherent in providing Federal student aid.

The Department stated that FSA has a broad compliance and oversight monitoring program
that includes making referrals to the OIG when it identifies potential fraud. The Department
further reported that its reviews of institutions are risk-based and that FSA uses predictive
analytics and data matching as part of its processes to address student financial assistance
fraud.

The Department identified numerous specific activities designed to improve its
effectiveness in overseeing and monitoring SFA program participants. This included the
following:




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     implementing and enhancing a customized verification process for Free Application for
      Federal Student Aid data elements that must be verified before an applicant received
      Title IV aid,
     providing training for Department employees,
     issuing guidance and proposing regulations,
     implementing a Quality Control Process regarding program reviews, and
     restructuring its external audit follow-up process.

What Needs to Be Done

Given the significant challenges that FSA faces in overseeing and monitoring SFA program
participants, the Department needs to improve its systems to ensure it has controls in place
to ensure funds are disbursed for only eligible students and to effectively manage the
performance of the Federal student loan portfolio.

Additionally, FSA needs to establish systematic procedures to evaluate the risks within its
programs, develop strategies to address risks identified, and implement those strategies to
ensure effective operations. FSA further needs to assess its control environment to ensure
that it is working to address known and newly identified risks including those OIG reviews
and other sources have identified.

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 there are 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 uses certain technologies to deliver
instruction to students who are separated from the instructor and to support regular and
substantive interaction between the student and the instructor. The flexibility it offers 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.

Progress in Meeting the Challenge

The OIG issued an Investigative Program Advisory Report in 2011 alerting FSA to
significant fraud vulnerability in distance education programs. The OIG report provided
recommendations that, if implemented, would mitigate future risk of fraud ring activity in the
Title IV programs. The Department reported that it has implemented numerous controls to
address these concerns, including expanding data analysis capabilities to detect patterns
and predict potential fraud and enhancing verification requirements. The Department stated


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that it is now incumbent on schools to verify certain data elements, such as the student’s
identity and whether the student completed secondary school or its equivalent. The
Department added it has also expanded the program review procedures to strengthen
oversight of distance education programs. The procedures were revised to expand general
assessment reviews, collect additional distance education recipient data, and expand the
annual risk assessment.

What Needs to Be Done

FSA needs to increase its monitoring and oversight of schools providing distance
education. The Department should gather information to identify students who are receiving
SFA program funds to attend distance education programs and other information needed to
analyze the differences between traditional education and distance education. Because
FSA does not require schools to indicate when a student is enrolled in a distance education
program, it cannot identify, analyze, and mitigate system problems related to distance
education. Our work indicates that the Department still needs to define instruction and
attendance in a distance education environment and clarify how to calculate the return of
Federal student aid in a distance education environment.

In addition, the Department should develop regulations that require schools offering
distance education to establish processes to verify a student's identity as part of the
enrollment process. Finally, the Department should work with Congress to amend the
Higher Education Act to specify that a school’s cost of attendance budget for a distance
education student should include only those costs that reflect actual educational expenses.

Oversight and Monitoring—Grantees

Why This Is a Challenge

Effective monitoring and oversight are essential for ensuring that grantees meet grant
requirements and achieve program goals and objectives. The Department’s early learning,
elementary, and secondary education programs annually serve nearly 16,900 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, which under the President’s 2016 request would
deliver $15.4 billion to help nearly 24 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 about $11.7 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
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

In its response to our draft Management Challenges report, the Department stated that
actions completed during FY 2015 included issuing policy and guidance and providing



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training and technical assistance to program staff to enhance business operations in the
area of grant award monitoring and oversight. The Department reported that it planned
additional activities for FY 2016 to improve its monitoring and oversight efforts that include
new training for Department employees on grant monitoring in on-site and virtual
environments, as well as training for grantees in the areas of cash management, internal
controls, discretionary and formula grants administration, and indirect cost.

What Needs to Be Done

Effective implementation of the Office of Management and Budget Uniform Grant Guidance,
with specific focus on requirements relating to internal control and recipient and
subrecipient monitoring, provides an excellent opportunity for the Department to address
longstanding challenges. The Department should also consider methods to use the single
audit process and updates to the Office of Management and Budget A-133 Compliance
Supplement as ways to improve its monitoring efforts and help mitigate fraud and abuse in
its programs. Given its vast oversight responsibilities and limited resources, it is especially
important for the Department to effectively implement actions that build its own capacity and
leverage the resources of other entities that have roles in grantee oversight.

In addition to its efforts to improve grant administration and oversight, the Department
should pursue several regulatory or statutory changes that would strengthen its ability to
detect and address fraud and abuse in its programs.

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 2015, more than
$5.6 billion2 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. These services include systems development, operation, and
maintenance; loan servicing and debt collection; technical assistance for grantees;
administrative and logistical support; and education research and program evaluations.

OIG audits have identified issues relating to the lack of effective oversight and monitoring of
contracts and contractor performance. These issues are primarily related to the
appropriateness of contract pricing and the effectiveness of contract management.

Progress in Meeting the Challenge

In its response to our draft Management Challenges report, the Department stated that its
high percentage of fixed-price contracts and deliverable-based payment schedules
inherently lowers the risk of improper payments and unsuccessful contract performance.

2
 This figure, from the Department’s active contracts list, represents the total amount obligated to currently
active contracts awarded by FSA, the Office of Chief Financial Officer’s Contracts and Acquisition Management,
and the National Assessment Governing Board. This list does not capture the amount obligated on contracts
awarded by the principal office’s executive office warrant holders.



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The Department believed that this approach, coupled with annual Contract Monitoring Plan
and Contract Management reviews, provides a comprehensive appraisal of contractor
performance and helps ensure that the Department manages and monitors its contracts
properly.

The Department stated that FSA’s contractor control environment has been strengthened
through process improvements and that FSA has recently established a Quality Assurance
team within its acquisition organization. The Department also reported that its Contracts
and Acquisitions Management function has undertaken actions to ensure that the
Department has appropriately qualified staff in place and in sufficient number to provide
effective oversight of its contracts.

What Needs to Be Done

The Department has outlined numerous processes and efforts that have to the potential to
improve its oversight and monitoring of contractors. The Department needs to develop
methods that can assist it in demonstrating the effectiveness of recent process changes.
These may include items such as assessing the effect of FSA’s Quality Assurance team on
its contractor control environment and the success of hiring and training activities intended
to increase its staffing of qualified contractor oversight professionals.

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 cited controls in place to help it mitigate risks and verify and validate the
data it relies on that included data system monitoring and edit checks, program monitoring,
evaluation of the accuracy and effectiveness of reporting, and partnering with third-party
reviewers. The Department further identified strategies that it is developing, considering, or
implementing to ensure continuous improvements. These strategies include developing
policies and procedures to improve and strengthen integrity in obtaining and reporting data;
coordinating technical assistance with stakeholders to establish a common understanding
of the verifiability, validity, and reliability of data sources; and continuing efforts to improve
data quality in the EDFacts system.




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What Needs to Be Done

The Department is working to improve staff capabilities and internal systems for analyzing
data and using it to improve programs. It must continue to work to implement effective
controls at all applicable levels of the data collection, aggregation, and analysis processes
to ensure that accurate and reliable data are reported. The multiple initiatives that the
Department has put in place to improve data quality show both the scope of the challenge it
faces as well as the effort needed to address this challenge area. In particular, its efforts to
develop and implement consistent policies and procedures and to assess the reliability of
key data are important steps needed to show progress in addressing this challenge.

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 8 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 2015 was $683.1 million. 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. For
example, we reported that FSA could not ensure that its contractor delivered a fully
functional debt management collection system because FSA did not develop an adequate
plan, ensure milestones were met, or use appropriate systems development tools. We also
identified additional areas for improvement, such as involving FSA’s Technology Office to
provide technical expertise in the analysis of cost proposals, future contract negotiations,
and evaluations of contractor cost overruns.

Progress in Meeting the Challenge

In its response to our draft Management Challenges report, the Department stated that
managing changes for numerous integrated systems requires effective enterprise change
management and investment management processes and continuous review of and
improvement on existing project and portfolio management activities. The Department
stated that to build on these capabilities, it must hire qualified staff and ensure that they are
appropriately trained.

The Department stated that FSA has established project and portfolio management
practices that support information technology systems development and implementation.

The Department further stated that it has addressed the OIG-identified and FY 2012 self-
reported issues related to Debt Management Collection System (DMCS) and ACS, Inc.,
Education Servicing System. A new contract was awarded to manage DMCS, and the new


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contract included explicit requirements related to the management and tracking of software
development activities. The Department also noted that an independent validation and
verification contract was awarded to bring more focus on DMCS development activities.
The Department stated that FSA has not experienced any further material deficiencies
related to system implementations, as the OIG confirmed in the FY 2014 financial
statement audit, and has seen significant improvement in a number of areas related to
DMCS operations and financial reporting.

What Needs to Be Done

The Department needs to continue to monitor contractor performance to ensure that it
corrects system deficiencies and that system performance fully supports the Department’s
financial reporting and operations. Similarly, the Department should ensure that all agreed-
on corrective actions are completed timely.

Further actions needed to address this challenge include improving management and
oversight of system development and life cycle management (to include system
modifications and enhancements) and ensuring that appropriate expertise to manage
system contracts (to include acceptance of deliverables) is obtained.




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                                     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 are:

     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 is to:

     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
                          FY 2012                                            Change (FY 2012
                                                 2014
                          Baseline                                            Baseline–2014)


              Square
                           1,563,641            1,550,158                                 13,483
              Footage



The square footage totals are for the office and warehouse domestic assets, which are
assets located in the 50 states, Washington, DC, and United States territories. The square
footage total includes owned and leased assets. Updated square footage information is
posted on the performance.gov website.




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               Civil Monetary Penalty Adjustment for Inflation
The Federal Civil Penalties Inflation Adjustment Act of 1990, as amended, requires
agencies to make regular and consistent inflationary adjustments of civil monetary penalties
to maintain their deterrent effect. To improve compliance with the act, and in response to
multiple audits and recommendations, agencies should report annually in the Other
Information section the most recent inflationary adjustments to civil monetary penalties to
ensure penalty adjustments are both timely and accurate.



     Penalty                 Authority               Date of Previous     Date of Current    Current Penalty
                                                       Adjustment          Adjustment             Level
Failure to              20 USC                        January 4, 2005     October 2, 2012        $30,000
provide                 1015(c)(5)
information for
cost of higher
education
Failure to              20 USC                        January 4, 2005     October 2, 2012        $30,000
provide                 1022d(a)(3)
information
regarding
teacher-
preparation
programs
Violation of            20 USC 1082(g)              November 18, 2002     October 2, 2012        $35,000
Title IV of the
HEA
Violation of            20 USC                      November 18, 2002     October 2, 2012        $35,000
Title IV of the         1094(c)(3)(B)
HEA
Failure to              20 USC                      No prior adjustment   October 2, 2012         $1,100
disclose                1228c(c)(2)(E)
information to
minor children
and parents
Improper                31 USC 1352                 November 18, 2002     October 2, 2012   $15,000 to $140,000
lobbying for            (c)(1)
Government
grants and
contracts
False claims            31 USC                      November 18, 2002     October 2, 2012         $7,000
and                     3802(a)(1)
statements




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Appendices
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 multidimensional review of higher education options for
students and provides links to other sites. http://nces.ed.gov/collegenavigator/

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

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. The College
Scorecard has been redesigned as a tool that further commits to the Administration’s Open
Data Initiative and incorporates direct input from students, families, and their advisers to
provide the clearest, most accessible, and most reliable national data on college cost,
graduation, debt, and postcollege earnings. The old way of assessing college choices relied
on static ratings lists compiled by someone who was deciding what value to place on
different factors. The new way of assessing college choices, with the help of technology
and open data, makes it possible for anyone—a student, a school, a policymaker, or a
researcher—to decide which factors to evaluate.
http://collegecost.ed.gov/scorecard/index.aspx

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




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

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

https://studentaid.ed.gov/sa/types/grants-scholarships/finding-scholarships

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

Resources for Adult and Career and Technical Education

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

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 Accountability and Transparency Act (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



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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.

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 prekindergarten
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



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describes the models and assumptions used to develop national and state-level projections.
http://nces.ed.gov/pubsearch/pubsinfo.asp?pubid=2013008

National Assessment of Educational Progress

The National Assessment of Educational Progress 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: FY 2015 List of Applicable Department Financial
             Statement Laws and Regulations

Financial Management Legislation

     Sarbanes-Oxley Act of 2002
     Accountability of Tax Dollars Act of 2002
     Improper Payments Information Act of 2002
     Reports Consolidation Act of 2000
     Federal Financial Assistance Management Improvement Act of 1999
     Clinger-Cohen Act of 1996
     Federal Financial Management Improvement Act of 1996
     Debt Collection Improvement Act of 1996
     Government Management Reform Act of 1994
     Inspector General Reform Act of 1994
     Government Performance and Results Act of 1993
     Debt Collection Act Amendments of 1993
     Cash Management Improvement Act Amendments of 1992
     Chief Financial Officers Act of 1990
     Cash Management Improvement Act of 1990
     Federal Credit Reform Act of 1990
     Federal Information Security Management Act of 2002 (FISMA)
     Prompt Payment Act of 1982 (amended 1988)
     Federal Managers Financial Integrity Act of 1982
     Debt Collection Act of 1982
     Title 31 U.S.C. Chapters 13 and 15
     Government Corporation Control Act 31 U.S.C. 9109 et seq
     Ensuring Continued Access to Student Loans Act of 2008 (ECASLA)
     College Cost Reduction and Access Act (CCRAA)
     American Recovery and Reinvestment Act of 2009
     Health Care and Education Reconciliation Act of 2010
     Student Aid and Fiscal Responsibility Act
     Digital Accountability and Transparency Act (Data Act)
     Uniform Administrative Procedures, Cost Principles, and Audit Requirements for
      Federal Awards (Uniform Guidance)—2 CFR 200



162                                                   FY 2015 Agency Financial Report—U.S. Department of Education
                                                                                       APPENDICES
                   FY 2015 LIST OF APPLICABLE DEPARTMENT FINANCIAL STATEMENT LAWS AND REGULATIONS


Federal Financial Management Regulations

OMB Circulars:

    OMB Circular A-11—Preparation and Submission of Budget Estimates; Preparation and
     Submission of Strategic Plans, Annual Performance Plans, and Annual Program
     Performance Reports; and, Planning, Budgeting, and Acquisition of Capital Assets
    OMB Circular A-21—Cost Principles for Educational Institutions
    OMB Circular A-50—Audit Follow-up
    OMB Circular A-87—Cost Principles for State, Local and Indian Tribal Governments
    OMB Circular A-102—Grants and Cooperative Agreements with State and Local
     Governments
    OMB Circular A-110—Uniform Administrative Requirements for Grants and Other
     Agreements with Institutions of Higher Education, Hospitals, and Other Nonprofit
     Organizations
    OMB Circular A-122—Cost Principles for Nonprofit Organizations
    OMB Circular A-123—Management’s Responsibility for Internal Control
    OMB Circular A-129—Managing Federal Credit Programs
    OMB Circular A-130—Management of Federal Information Resources
    OMB Circular A-133—Audits of States, Local Governments, and Non-Profit
     Organizations
    OMB Circular A-136—Financial Reporting Requirements

Central Agency Regulations:

    GSA Federal Acquisition Regulation, Parts 30, 31, and 32
    U.S. Treasury Financial Manual (TFM)

Department of Education Regulations:

    Code of Federal Regulations (CFR) 34, Education




FY 2015 Agency Financial Report—U.S. Department of Education                                  163
APPENDICES




       Appendix C: Glossary of Acronyms and Abbreviations
AARTS        Audit Accountability and Resolution Tracking System

ABCP         Asset-Backed Commercial Paper

ADA          Anti-Deficiency Act

AFR          Agency Financial Report

APG          Agency Priority Goals

APR          Annual Performance Report

CAP          Corrective Action Plan

CAP Goals Cross-Agency Priority Goals

CAT          Core Assessment Team

CCMS         Continuous Controls Monitoring System

CCRA         College Cost and Reduction and Access Act of 2007

CFO          Chief Financial Officer

CFR          Code of Federal Regulations

CHAFL        College Housing and Academic Facilities Loan Program

CPSS         Contract and Purchasing Support System

CRDC         Civil Rights Data Collection

CSRS         Civil Service Retirement System

DATA         Digital Accountability and Transparency Act of 2014

DCIA         Debt Collection Improvement Act of 1996

DMCS         Data Management Collection System

DMF          Death Master File

DNP          Do Not Pay

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




164                                                FY 2015 Agency Financial Report—U.S. Department of Education
                                                                                          APPENDICES
                                                               GLOSSARY OF ACRONYMS AND ABBREVIATIONS


EDCAPS             Education Central Automated Processing System

EFC                Expected Family Contribution

ERM                Enterprise Risk Management

ERR                Entity Risk Reviews

ESEA               Elementary and Secondary Education Act of 1965

FAFSA              Free Application for Federal Student Aid

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

FMSS               Financial Management Support System

FSA                Federal Student Aid

FSEOG              Federal Supplemental Educational Opportunity Grant

FTF                Freeze the Footprint

FY                 Fiscal Year

G5                 Grants Management System

GAAP               Generally Accepted Accounting Principles

GAO                Government Accountability Office

GEPA               General Education Provisions Act

GPRA               Government Performance and Results Act of 1993

GPRAMA             GPRA Modernization Act of 2010

GSA                General Services Administration

HBCUs              Historically Black Colleges and Universities




FY 2015 Agency Financial Report—U.S. Department of Education                                      165
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

ICAM        Identify, Credentialing and Access Management

IDEA        Individuals with Disabilities Education Act

IES         Institute of Education Sciences

IFAP        Information for Financial Aid Professionals

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

ISCM        Information Security Continuous Monitoring

IT          Information Technology

KEA         Kindergarten Entry Assessment

LEA         Local Educational Agency

LINCS       Literacy Information and Communication Systems

NAEP        National Assessment of Educational Progress

NCES        National Center for Educational Statistics

NCLB        No Child Left Behind Act of 2001

NFP         Not-for-profit

NIEER       National Institute for Early Education Research

OA          Occupancy Agreement

OCFO        Office of the Chief Financial Officer

OCIO        Office of the Chief Information Officer




166                                                   FY 2015 Agency Financial Report—U.S. Department of Education
                                                                                          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

OM                 Office of Management

OMB                Office of Management and Budget

OPE                Office of Postsecondary Education

OPM                Office of Personnel Management

OSEP               Office of Special Education Programs

OSERS              Office of Special Education and Rehabilitative Services

PAYE               Pay as You Earn

PDF                Portable Document Format

PEPS               Postsecondary Education Participants System

PIC                Performance Improvement Council

PIV                Personal Identity Verification

POC                Principal Office Component

RDA                Results Driven Accountability

RELs               Regional Educational Laboratories

RMS                Risk Management Service

ROE                Regional Office of Education

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




FY 2015 Agency Financial Report—U.S. Department of Education                                      167
APPENDICES
GLOSSARY OF ACRONYMS AND ABBREVIATIONS


SAP         Special Allowance Payments

SAT         Senior Assessment Team

SBR         Statement of Budgetary Resources

SEA         State Educational Agency

SF          Square Feet

SFA         Student Financial Assistance

SFFAS       Statement of Federal Financial Accounting Standards

SIG         School Improvement Grant

SMC         Senior Management Council

SOC         Security Operations Council

SOS         Schedule of Spending

SPFI        Summary of Performance and Financial Information

SSIP        State System

SSP         System Security Plan

STEM        Science, Technology, Engineering, and Mathematics

TEACH       Teacher Education Assistance for College and Higher Education Grant

TFM         Treasury Financial Manual

TIVAS       Title IV Additional Servicers

TOP         Treasury’s Offset Program

Treasury    U.S. Department of Treasury

TRIO        Federal TRIO Programs

U.S.        United States

USSGL       U.S. Standard General Ledger




168                                              FY 2015 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 Operations (FIO)
provides leadership and direction in the areas of               Office of Planning, Evaluation, and
internal control assessment, financial                          Policy Development
management training, post audit activities, and
indirect cost determination.                                    Office of the Chief Information Officer

Contracts and Acquisitions Management (CAM)                     Partners:
is responsible for the solicitation, award,
administration, and closeout of all contracts and               Office of Management and Budget
other acquisition instruments for the Department.
                                                                Department of Treasury
We offer our sincerest thanks and
acknowledgment to staff of all participating                    Government Accountability Office
principal offices. In particular, we recognize the
following organizations for their contribution:                 Association of Government
                                                                Accountants




                      The following companies were contracted to assist in the preparation of the
                           U.S. Department of Education FY 2015 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 2015 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 2015




FY 2015 Agency Financial Report—U.S. Department of Education                                               169
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