Archived Information

Note 1. Summary of Significant Accounting Policies

Reporting Entity

The U.S. Department of Education (the Department) was established on May
4, 1980, by Congress, under the Department of Education Organization Act
of 1979 (Public Law 96‑88). It is responsible, through the execution of
its congressionally approved budget, for administering direct loans,
guaranteed loans, and grant programs.

The Department administers the Federal Direct Student Loan Program, the
Federal Family Education Loan (FFEL) Program, Pell Grants, and
Campus-Based Student Aid Programs. The Federal Direct Student Loan
Program, authorized by the Student Loan Reform Act of 1993, enables the
Department to make loans directly to eligible undergraduate and graduate
students and their parents through participating schools. The Federal
Family Education Loan (FFEL) Program, authorized by the Higher Education
Act of 1965, as amended (HEA), cooperates with state and private
nonprofit Guaranty Agencies to provide loan guarantees and interest
subsidies on loans made by private lenders to eligible students. The
Pell Grant and Campus-Based Programs provide educational grants and
other financial assistance to eligible applicants.

The Department also administers numerous Grant Programs and the
Facilities Loan Programs. Grant Programs include grants for elementary
and secondary education, special education and rehabilitative services,
and educational research and improvement, along with grants for needs of
the disadvantaged. Through the Facilities Loan Programs, the Department
administers low-interest loans to institutions of higher learning for
the construction and renovation of facilities.

Organization and Structure at the Department of Education

The statements consolidate 225 discrete appropriations comprising 60
fund accounts within the following 10 reporting groups:

-   Federal Student Aid (FSA)

-   Office of Elementary and Secondary Education (OESE)

-   Office of Special Education and Rehabilitative Services (OSERS)

-   Office of Vocational and Adult Education (OVAE)

-   Office of Postsecondary Education (OPE)

-   Institute of Education Sciences (IES)

-   Office of English Language Acquisition (OELA)

-   Office of Safe and Drug-Free Schools (OSDFS) (Established FY 2004)

-   Office of Innovation and Improvement (OII) (Established FY 2004)

-   Department Management (DM)

Basis of Accounting and Presentation

These consolidated financial statements have been prepared to report the
financial position, net cost of operations, changes in net position,
budgetary resources, and financing of the U.S. Department of Education,
as required by the

Chief Financial Officers Act of 1990 and the Government Management
Reform Act of 1994. The financial statements were prepared from the
books and records of the Department, in accordance with accounting
principles generally accepted (GAAP) in the United States of America and
Office of Management and Budget (OMB) Bulletin 01-09, *Form and Content
of Agency Financial Statements*. GAAP for federal entities are the
standards prescribed by the Federal Accounting Standards Advisory Board
(FASAB), which is the official standard setting body for the federal
government. These financial statements are different from the financial
reports prepared by the Department pursuant to OMB directives that are
used to monitor and control the Department's use of budgetary resources.

The financial statements should be read with the realization they are a
component of the U.S. government, a sovereign entity. One implication of
this is that 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.

Use of Estimates

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

Estimates for credit program receivables and liabilities contain
assumptions that have a significant impact on the financial statements.
The primary components of this assumption set include, but are not
limited to, collections (including loan consolidations), repayments,
default rates, prevailing interest rates and loan volume. Actual loan
volume, interest rates, cash flows and other critical components used in
the estimation process may differ significantly from the assumptions
made at the time the financial statements were prepared. Minor
adjustments to any of these assumption components may create significant
changes to the estimate.

The Department recognizes the sensitivity of the changes in assumptions
and the impact that the projections can have on estimates. Management
has attempted to mitigate these fluctuations by using trend analysis to
project future cash flows. The assumptions used for the September 30,
2004 and 2003, financial statements are based on the best information
available at the time the estimate was derived.

Changes in assumptions could significantly affect the amounts reflected
in these statements. For example, a long-term change in the projected
interest rate charged to borrowers could change the current subsidy
re-estimate by a significant amount.

The Student Loan Model (SLM) and estimating methods used are updated
periodically to reflect changing conditions. The SLM was the official
estimating model of the Department as of September 30, 2004 and 2003,
and was used to calculate the subsidy re-estimates recorded in these
financial statements.

Budget Authority

Budget authority is the authorization provided by law for the Department
to incur financial obligations that will result in outlays. The
Department's budgetary resources for fiscal years 2004 and 2003 included
(1) unobligated balances of resources from prior years, (2) recoveries
of obligations in prior years, and (3) new resources---appropriations,
authority to borrow from the U.S. Department of Treasury (Treasury), and
spending authority from collections. Unobligated balances associated
with resources expiring at the end of the fiscal year remain available
for five years after expiration only for upward adjustments of
prior-year obligations, after which they are canceled and may not be
used. Unobligated balances of resources that have not expired at
year-end may have new obligations placed against them, as well as net
upward adjustments of prior-year obligations.

Treasury Debt provides most of the funding for the loan principal
disbursements made under the Federal Direct Student Loan Program.
Subsidy and administrative costs of the program are funded by
appropriations. Budgetary resources from collections are used primarily
to repay the Department's debt to Treasury. Major sources of collections
include\
(1) principal and interest collections from borrowers or through the
consolidation of loans to borrowers, (2) related fees, and (3) interest
from Treasury on balances in certain credit accounts that make and
administer loans and guarantees.

Fund Balance with Treasury

The Department maintains cash accounts with Treasury. The fund balance
with Treasury includes appropriated, revolving, and trust funds
available to pay current liabilities and finance authorized purchases,
as well as funds restricted until future appropriations are received.
Treasury processes the cash receipts and cash disbursements for the
Department. The Department's records are reconciled with those of
Treasury. (See Note 2.)

Cash and Other Monetary Assets

Cash and other monetary assets consist of Guaranty Agency reserves and
deposits in transit. Guaranty Agency reserves represent the Department's
interest in the net assets of the FFEL program Guaranty Agencies.
Guaranty Agency reserves are classified as non-entity assets with the
public (see Note 3) and are offset by a corresponding liability due to
Treasury. Guaranty Agency reserves include initial federal start-up
funds (Guaranty Agency advances), receipts of federal reinsurance
payments, insurance premiums, Guaranty Agency share of collections on
defaulted loans, investment income, administrative cost allowances, and
other assets purchased out of reserve funds.

Section 422A of the HEA required FFEL Guaranty Agencies to establish a
Federal Student Loan Reserve Fund (the "Federal Fund") and an Operating
Fund by December 6, 1998. The Federal Fund and the non-liquid assets
developed or purchased by a Guaranty Agency as a result, in whole or in
part with federal funds, are the property of the United States. However,
such ownership by the Department is independent of the actual control of
the assets.

The Department disburses funds to the Guaranty Agency through the
Federal Fund to pay lender claims and default aversion fees of a
Guaranty Agency. The Operating Fund is the property of the Guaranty
Agency except for funds an agency borrows from the Federal Fund (under
Section 422A of the HEA). The Operating Fund is used by the Guaranty
Agency to fulfill its responsibilities. These responsibilities include
repaying money borrowed from the Federal Fund, default aversion and
collection activities.

Accounts Receivable

Accounts receivable are amounts due to the Department from the public
and other federal agencies. Receivables from the public typically result
from such items as overpayments of educational assistance, whereas
amounts due from other federal agencies result from agreements entered
into by the Department with these agencies for various goods and
services. Accounts receivable are recorded at cost less an allowance for
uncollectible amounts. The estimate of the allowance for loss on
uncollectible accounts is based on experience in the collection of
receivables and an analysis of the outstanding balances. (See Note 5.)

Credit Program Receivables and Liabilities for Loan Guarantees

The financial statements at September 30, 2004 and 2003, reflect the
Department's estimate of the long-term cost of direct and guaranteed
loans in accordance with the Federal Credit Reform Act of 1990 (the
Act). Loans and interest receivable are valued at their gross amounts
less an allowance for the present value of the amounts not expected to
be recovered and thus having to be subsidized---called "allowance for
subsidy." The difference is the present value of the cash flows to and
from the Department that are expected from the receivables over their
expected 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
(primarily defaults) is net of recoveries, interest supplements, and
offsetting fees. The Department records all credit program loans and
loan guarantees at their present values.

Components of subsidy costs involved with loans and guarantees include
defaults, net of recoveries, contractual payments to third-party private
loan collectors who receive a set percentage of amounts they collect,
and, as an offset, application and other fees to be collected. For
direct loans, the difference between interest rates incurred by the
Department on its borrowings from Treasury and interest rates charged to
target groups is also subsidized (or may provide an offset to subsidy if
the Department's rate is less). The corresponding interest subsidy in
loan guarantee programs is the payment of interest supplements to
third-party lenders in order to buy down the interest rates on loans
made by those lenders. Subsidy costs are recognized when direct loans or
guaranteed loans are disbursed to borrowers and are re-estimated each
year. (See Note 4.)

General Property, Plant and Equipment

The Department capitalizes single items of property and equipment with a
cost of \$50,000 or more that have an estimated useful life greater than
two years. Additionally, 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 greater than two years.
Property and Equipment are depreciated over their estimated useful lives
using the straight-line method of depreciation. (See Note 6.) Internal
Use Software (IUS) meeting the above cost and useful life criteria is
also capitalized. IUS is software purchased off the shelf, internally
developed, or contractor developed solely to meet the agency's internal
needs.

The Department adopted the following useful lives for the major classes
of depreciable property and equipment:

  ---------------------------------------------------------------- -----------
  **Major Classes of Depreciable Property and Equipment**          **Years**

  Information Technology (IT), Internal Use Software (IUS) and     3
  Telecommunications equipment                                     

  Furniture and Fixtures                                           5
  ---------------------------------------------------------------- -----------

Liabilities

Liabilities represent actual and estimated amounts likely to be paid as
a result of transactions or events that have already occurred. However,
no liabilities can be paid by the Department without an appropriation or
other collection of revenue for services provided. Liabilities for which
an appropriation has not been enacted are classified as liabilities not
covered by budgetary resources, and there is no certainty the
appropriation will be enacted. Liabilities of the Department arising
from other than contracts can be abrogated by the government acting in
its sovereign capacity. FFEL and Federal Direct Student Loan Program
liabilities are entitlements covered by permanent indefinite budget
authority enacted as of year-end.

Treasury Debt

The amount shown for the liability to Treasury from borrowings
represents unpaid principal owing on the loans at year-end associated
with the Department's loan activities. The Department repays the loan
principal based on available fund balances. Interest on the debt is
calculated at fiscal year-end using rates set by Treasury, with such
rates generally fixed based on the rate for 10-year securities. As
discussed in Note 4, the interest received by the Department from
borrowers will vary from the rate paid to the Treasury. Principal and
interest payments are made annually. (See Note 7.)

Accrued Grant Liability

Disbursements of grant funds are recognized as expenses at the time of
disbursement. However, some grant recipients incur expenditures prior to
initiating a request for disbursement based on the nature of the
expenditures. A liability is accrued by the Department for expenditures
incurred by grantees prior to receiving grant funds for the
expenditures. The amount is estimated using statistical sampling
techniques. (See Note 11.)

Net Position

Net position consists of unexpended appropriations and cumulative
results of operations. Unexpended appropriations include undelivered
orders and unobligated balances of appropriations, except those for
federal credit financing and liquidating funds, and trust funds.
Cumulative results of operations represent the net difference since
inception between (1) expenses and (2) revenues and financing sources.
(See Note 12.)

Personnel Compensation and Other Employee Benefits

**Annual, Sick and Other Leave.** The liability for annual leave,
compensatory time off, and other leave is accrued when earned and
reduced when taken. Each year, the accrued annual leave account balance
is adjusted to reflect current pay rates. Annual leave earned but not
taken, within established limits, is funded from future financing
sources. Sick leave and other types of non-vested leave are expensed as
taken.

**Retirement Plans and Other Employee Benefits.** Employees participate
either in the Civil Service Retirement System (CSRS), a defined benefit
plan, or in the Federal Employees Retirement System (FERS), a defined
benefit and contribution plan. For CSRS employees, the Department
contributes a fixed percentage of pay. For FERS employees, the
Department contributes fixed percentages to both a defined benefits plan
and a defined contributions plan (Thrift Savings Plan). For FERS
employees, the Department also contributes the employer's share for
Social Security (FICA) and Medicare.

The FERS program is fully funded by agency and worker contributions.
Such contributions for other retirement plans and benefits are
insufficient to fully fund the programs, which are subsidized by the
Office of Personnel Management (OPM). The Department imputes its share
of the OPM subsidy, using cost factors OPM provides, 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, to employees who
have incurred work-related occupational diseases, and to 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 (Labor), 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 by Labor but not yet reimbursed by the
Department. The Department reimburses Labor for the amount of actual
claims as funds are appropriated for this purpose. There is generally a
two to three year time period between payment by Labor and reimbursement
to Labor by the Department. As a result, the Department recognizes a
liability for the actual claims paid by Labor and to be reimbursed by
the Department.

The second component is the estimated liability for future benefit
payments as a result of past events. This liability includes death,
disability, medical and miscellaneous costs. Labor determines this
component annually, as of September 30, using a method that considers
historical benefit payment patterns, wage inflation factors, medical
inflation factors, and other variables. The projected annual benefit
payments are discounted to present value using the Office of Management
and Budget economic assumptions for 10-year Treasury notes and bonds. To
provide for the effects of inflation on the liability, wage inflation
factors (i.e., cost of living adjustments) and medical inflation factors
(i.e., consumer price index medical adjustments) are applied to the
calculation of projected future benefit payments. These factors are also
used to adjust historical benefit payments and to adjust future benefit
payments to current-year constant dollars. A discounting formula is also
used to recognize the timing of benefit payments as 13 payments per year
instead of one lump sum payment per year.

Labor evaluates the estimated projections to ensure that the resulting
projections were reliable. The analysis includes two tests: (1) a
comparison of the percentage change in the liability amount by agency to
the percentage change in the actual payments, and (2) a comparison of
the ratio of the estimated liability to the actual payment of the
beginning year calculated for the current projection to the
liability-payment ratio calculated for the prior projection.

Intragovernmental Transactions

The Department's financial activities interact and are dependent upon
the financial activity of the centralized management functions of the
federal government. The Department is subject to financial regulation
and management control by the Office of Management and Budget and
Treasury. As a result of this relationship, operations may not be
conducted and financial positions may not be reported as they would if
the Department were a separate, unrelated entity. Transactions and
balances among the Department's entities have been eliminated from the
Consolidated Balance Sheet.

Other Intragovernmental Assets

Other intragovernmental assets represent interagency agreements between
the Department and the National Science Foundation (NSF). As of
September 30, 2004 and 2003, other intragovernmental assets totaled \$17
million and \$27 million, respectively. These agreements were entered
into prior to FY 2003 and were appropriately treated as an expense by
the Department. During FY 2003, NSF informed the Department that \$27
million was recorded on NSF's books as an "advance from others." This
amount represents unexpended balances for interagency agreements with
the Department. The Department began recording "advances to others" in
order to facilitate the United States Financial Statement Consolidated
Eliminations (for federal governmentwide financial statements) in FY
2003. Accordingly, the previous expense of \$27 million associated with
the NSF interagency agreements was reversed in FY 2003 as a prior period
adjustment and recorded as an "advance to others."

Note 2. Fund Balance with Treasury

Fund balance with Treasury at September 30, 2004 and 2003, consisted of
the following:

+------------------------------------------+-----------+---+----------+
| ***[(Dollars in                          | **2004**  |   | **2003** |
| Millions)]{.underline}***                |           |   |          |
+------------------------------------------+-----------+---+----------+
| Appropriated Funds                       | \$ 49,353 |   | \$       |
|                                          |           |   | 46,637   |
+------------------------------------------+-----------+---+----------+
| Revolving Funds                          | 17,010    | [ | 11,190   |
|                                          |           | ] |          |
|                                          |           | { |          |
|                                          |           | . |          |
|                                          |           | m |          |
|                                          |           | a |          |
|                                          |           | r |          |
|                                          |           | k |          |
|                                          |           | } |          |
+------------------------------------------+-----------+---+----------+
| Other Funds                              | 8         | [ | 81       |
|                                          |           | ] |          |
|                                          |           | { |          |
|                                          |           | . |          |
|                                          |           | m |          |
|                                          |           | a |          |
|                                          |           | r |          |
|                                          |           | k |          |
|                                          |           | } |          |
+------------------------------------------+-----------+---+----------+
| **Total Fund Balance with Treasury**     | []{.mark} | [ | [        |
|                                          |           | ] | ]{.mark} |
|                                          | **\$      | { |          |
|                                          | 66,371**  | . | **\$     |
|                                          |           | m | 57,908** |
|                                          |           | a |          |
|                                          |           | r |          |
|                                          |           | k |          |
|                                          |           | } |          |
+------------------------------------------+-----------+---+----------+

+------------------------------------------+----------+----+----------+
| **Status of Fund Balance with Treasury** |          |    |          |
+------------------------------------------+----------+----+----------+
| ***[(Dollars in                          | **2004** |    | **2003** |
| Millions)]{.underline}***                |          |    |          |
+------------------------------------------+----------+----+----------+
| Unobligated Balance                      |          |    |          |
+------------------------------------------+----------+----+----------+
| \- Available                             | \$ 1,603 | [  | \$ 3,377 |
|                                          |          | ]{ |          |
|                                          |          | .m |          |
|                                          |          | ar |          |
|                                          |          | k} |          |
+------------------------------------------+----------+----+----------+
| \- Unavailable                           | 14,738   | [  | 10,609   |
|                                          |          | ]{ |          |
|                                          |          | .m |          |
|                                          |          | ar |          |
|                                          |          | k} |          |
+------------------------------------------+----------+----+----------+
| Obligated Balance, Not Yet Disbursed     | 50,022   | [  | 43,841   |
|                                          |          | ]{ |          |
|                                          |          | .m |          |
|                                          |          | ar |          |
|                                          |          | k} |          |
+------------------------------------------+----------+----+----------+
| Other Funds                              | 8        | [  | 81       |
|                                          |          | ]{ |          |
|                                          |          | .m |          |
|                                          |          | ar |          |
|                                          |          | k} |          |
+------------------------------------------+----------+----+----------+
| **Total Status of Fund Balance with      | **\$     | [  | [        |
| Treasury**                               | 66,371** | ]{ | ]{.mark} |
|                                          |          | .m |          |
|                                          |          | ar | **\$     |
|                                          |          | k} | 57,908** |
+------------------------------------------+----------+----+----------+

Fund Balance with Treasury is an entity asset maintained with Treasury.
The monies are available to pay current liabilities and finance loan
programs. The Department has the authority to disburse funds to agencies
and institutions participating in its programs through the Treasury,
which processes cash receipts and disbursements on its behalf.

A portion of the appropriated funds included at September 30, 2004 and
2003, was funded in advance by multi-year appropriations for
expenditures anticipated during the current and future fiscal years.
Revolving funds conduct continuing cycles of business-like activity and
do not require an annual appropriation. Their fund balance comes from
collections (other federal entities and the public) and from borrowings.
Other funds primarily consist of suspense, deposit funds and clearing
accounts.

Available unobligated balances represent amounts that are apportioned
for obligation in the current fiscal year. Unavailable unobligated
balances represent amounts that are not apportioned for obligation
during the current fiscal year and expired appropriations no longer
available to incur new obligations. Obligated balances not yet disbursed
include reimbursements and other income earned, undelivered orders and
expended authority-unpaid.

Note 3. Cash and Other Monetary Assets

Cash and Other Monetary Assets consisted of Guaranty Agency reserves
(non-entity assets) and deposits in transit as of September 30, 2004 and
2003.

  --------------------------------- --------------- -- ------------- -- -----------
                                    **2004**                            

  ***[(Dollars in                   **Guaranty\        **Deposits\      **Total**
  Millions)]{.underline}***         Agency             in Transit**     
                                    Reserves**                          

                                                                        

  **Beginning Balance, September    \$ 1,107           \$ 1             \$ 1,108
  30**                                                                  

  Current Year Activity             \(67\)             \(1\)            \(68\)

  **Ending Balance, September 30**  **\$ 1,040**       **\$** **-**     **\$
                                                                        1,040**
  --------------------------------- --------------- -- ------------- -- -----------

+--------------------------------+---+--------------+---+--------+---+-------+---+
|                                |   | **2003**     |   |        |   |       |   |
+--------------------------------+---+--------------+---+--------+---+-------+---+
| ***[(Dollars in                | * |              |   | **Dep  |   | **To  |   |
| Millions)]{.underline}***      | * |              |   | osits\ |   | tal** |   |
|                                | G |              |   | in     |   |       |   |
|                                | u |              |   | Tra    |   |       |   |
|                                | a |              |   | nsit** |   |       |   |
|                                | r |              |   |        |   |       |   |
|                                | a |              |   |        |   |       |   |
|                                | n |              |   |        |   |       |   |
|                                | t |              |   |        |   |       |   |
|                                | y |              |   |        |   |       |   |
|                                | \ |              |   |        |   |       |   |
|                                | A |              |   |        |   |       |   |
|                                | g |              |   |        |   |       |   |
|                                | e |              |   |        |   |       |   |
|                                | n |              |   |        |   |       |   |
|                                | c |              |   |        |   |       |   |
|                                | y |              |   |        |   |       |   |
|                                | R |              |   |        |   |       |   |
|                                | e |              |   |        |   |       |   |
|                                | s |              |   |        |   |       |   |
|                                | e |              |   |        |   |       |   |
|                                | r |              |   |        |   |       |   |
|                                | v |              |   |        |   |       |   |
|                                | e |              |   |        |   |       |   |
|                                | s |              |   |        |   |       |   |
|                                | * |              |   |        |   |       |   |
|                                | * |              |   |        |   |       |   |
+--------------------------------+---+--------------+---+--------+---+-------+---+
|                                |   |              |   |        |   |       |   |
+--------------------------------+---+--------------+---+--------+---+-------+---+
| **Beginning Balance, September | \ |              |   | \$ 36  |   | \$    | [ |
| 30**                           | $ |              |   |        |   | 1,205 | ] |
|                                | 1 |              |   |        |   |       | { |
|                                | , |              |   |        |   |       | . |
|                                | 1 |              |   |        |   |       | m |
|                                | 6 |              |   |        |   |       | a |
|                                | 9 |              |   |        |   |       | r |
|                                |   |              |   |        |   |       | k |
|                                |   |              |   |        |   |       | } |
+--------------------------------+---+--------------+---+--------+---+-------+---+
| Current Year Activity          | \ |              |   | \(35\) |   | \     | [ |
|                                | ( |              |   |        |   | (97\) | ] |
|                                | 6 |              |   |        |   |       | { |
|                                | 2 |              |   |        |   |       | . |
|                                | \ |              |   |        |   |       | m |
|                                | ) |              |   |        |   |       | a |
|                                |   |              |   |        |   |       | r |
|                                |   |              |   |        |   |       | k |
|                                |   |              |   |        |   |       | } |
+--------------------------------+---+--------------+---+--------+---+-------+---+
| []{.mark}                      | * |              |   | **\$** |   | **\$  | [ |
|                                | * |              |   | **1**  |   | 1,    | ] |
| **Ending Balance, September    | \ |              |   |        |   | 108** | { |
| 30**                           | $ |              |   |        |   |       | . |
|                                | 1 |              |   |        |   |       | m |
|                                | , |              |   |        |   |       | a |
|                                | 1 |              |   |        |   |       | r |
|                                | 0 |              |   |        |   |       | k |
|                                | 7 |              |   |        |   |       | } |
|                                | * |              |   |        |   |       |   |
|                                | * |              |   |        |   |       |   |
+--------------------------------+---+--------------+---+--------+---+-------+---+

Guaranty Agency reserves are collected and held on behalf of the U.S.
government, a liability due to Treasury and considered intragovernmental
liabilities. These balances represent the federal government's interest
in the net assets of state and nonprofit FFEL Program Guaranty Agencies.
(See Note 1.)

On September 30, 2004 and 2003, Guaranty Agencies held approximately
\$1,040 million and \$1,107 million in federal assets, respectively. The
agencies use the funds to pay lender claims, primarily for loan defaults
and discharges. Consistent with Section 422A(e) of the HEA, these funds
are considered "property of the United States" and are reflected in the
*Budget of the United States Government.*

Note 4. Credit Program Receivables and Liabilities for Loan Guarantees

The Department operates the William D. Ford Direct Student Loan and
Federal Family Education Loan (FFEL) programs to help students finance
the costs of higher education. Under the programs, the Department makes
loans directly or guarantees all or a portion of loans made by
participating lending institutions to individuals who meet statutorily
set eligibility criteria and attend eligible institutions of higher
education---public and private two- and four-year institutions, graduate
schools, and vocational training schools. Students and their parents
receive loans regardless of income or credit rating; student borrowers
who demonstrate financial need also receive federal interest subsidies.

Under the Direct Loan program, the federal government makes loans
directly to students and parents through participating schools. Loans
are originated and serviced through contracts with private vendors.
Under the FFEL program, more than 3,400 financial institutions make
loans directly to students and parents. FFEL loans are guaranteed by the
federal government against default, with 36 state or private nonprofit
Guaranty Agencies acting as intermediaries in administering the
guarantees. Beginning with loans first disbursed on or after
October 1, 1993, financial institutions became responsible for
two percent of the cost of each default. Guaranty Agencies also began
paying a portion of the cost (in most cases, five percent) of each
defaulted loan from federal funds they hold in trust. FFEL lender
participants receive statutorily set federal interest and special
allowance subsidies; Guaranty Agencies receive fee payments as set by
statute. In most cases, loan terms and conditions under the two programs
are identical.

The Federal Credit Reform Act of 1990 (the Act) underlies the
proprietary and budgetary accounting treatment of direct and guaranteed
loans. The long-term cost to the government for direct loans or loan
guarantees, other than for general administration of the programs, is
referred to as "subsidy cost." Under the Act, subsidy costs for loans
obligated beginning in FY 1992 are the net present value of projected
lifetime costs in the year the loan is disbursed. Subsidy costs are
revalued annually through the re-estimate process.

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

The Department uses a computerized cash flow projection Student Loan
Model (SLM) to calculate subsidy estimates for Direct Loans and
guaranteed FFEL program loans. Cash flows are projected over the life of
the loan, aggregated by loan type, cohort year, and risk category. The
loan's cohort year represents the year a direct loan was obligated or a
loan was guaranteed, regardless of the timing of disbursements. Risk
categories include two-year colleges, freshmen and sophomores at
four-year colleges, juniors and seniors at four-year colleges, graduate
schools, and proprietary (for-profit) schools.

The estimates reflected in these statements were prepared using
assumptions developed for the FY 2005 Mid-Session Review, a
governmentwide exercise required annually by the OMB. These estimates
are the most current available to the Department at the time the
financial statements are prepared. Department management has a process
to review these estimates in the context of subsequent changes in
assumptions, and reflect the impact of these changes as appropriate.

In recent years, the consolidation of existing loans into new direct or
guaranteed loans has increased significantly. Under the Act and
requirements provided by OMB Circular No. A-11, *Preparation,
Submission, and Execution of the Budget*, the retirement of loans being
consolidated is considered a receipt of principal and interest; this
receipt is offset by the disbursement related to the newly created
consolidation loan. The underlying direct or guaranteed loans, whether
performing or non-performing, in any given cohort are paid off in their
original cohort and new loans are opened in the cohort in which
consolidation activity occurs. This consolidation activity is taken into
consideration in establishing the subsidy rate for defaults.

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

The Department disbursed approximately \$20 billion in Direct Loans to
eligible borrowers in FY 2004 and approximately \$18 billion in FY 2003.
Half of all loan volume is obligated in the fourth quarter of the fiscal
year. Loans typically disburse in multiple installments over an academic
period; as a result, loan disbursements for an origination cohort year
often cross fiscal years. Regardless of the fiscal year in which they
occur, disbursements are tracked by the cohort to which they belong,
which is determined by the time of obligation rather than disbursement.

As of September 30, 2004 and 2003, the total principal balances
outstanding of guaranteed loans held by lenders were approximately \$245
billion and \$213 billion, respectively. As of September 30, 2004 and
2003, the estimated maximum government exposure on outstanding
guaranteed loans held by lenders was approximately \$240 billion and
\$209 billion, respectively. Of the insured amount, the Department would
pay a smaller amount to the Guaranty Agencies, based on the appropriate
reinsurance rates, which range from 100 to 95 percent. Any remaining
insurance not paid as reinsurance would be paid to lenders by the
Guaranty Agencies from their federal funds. Payments by Guaranty
Agencies do not reduce government exposure because they are made from
federal funds administered by the agencies.

The Department accrues interest receivable and records interest revenue
on its performing direct loans. Given the Department's substantial
collection rates, interest receivable is also accrued and interest
revenue recognized on defaulted direct loans. Guaranteed loans that
default are initially turned over to Guaranty Agencies for collection,
and interest receivable is accrued and recorded on the loans as the
collection rate is substantial. After approximately four years,
defaulted guaranteed loans not in repayment are turned over to the
Department for collection; accrued interest is calculated but only
realized upon collection. Interest income is recognized for performing
and defaulted direct loans. The Department does not record interest
income on defaulted guaranteed loans; all borrower interest actually or
expected to be accrued or received is used in estimating the FFEL
liability for loss and allowance for subsidy.

As previously noted, borrowers may prepay and close out existing loans
without penalty from capital raised through the disbursement of a new
consolidation loan. The loan liability and net receivables include
estimates of future prepayments of existing loans; they do not reflect
costs associated with anticipated future consolidation loans.

Due to the nature of the loan commitment process in which schools
establish a loan commitment with the filing of an aid application, which
may occur before a student has been accepted by the school or begins
classes, approximately      seven percent of loan commitments are never
disbursed. For Direct Loans committed in FY 2004, an estimated \$1.3
billion will not be disbursed; for guaranteed loans committed in FY
2004, an estimated \$6.3 billion will not be disbursed. Direct Loan
schools may originate loans through a cash advance from the Department,
establishing a loan receivable, or by advancing their own funds in
anticipation of reimbursement from the Department.

Credit Program Receivables, Net

The Credit Program Receivables, Net consisted of the following program
loans:

  ----------------------------------------- ------------- -- ---------- -------------
  ***[(Dollars in Millions)]{.underline}*** **2004**         **2003**   

  Direct Loan Program Loan Receivables, Net \$ 93,747                   \$ 86,634

  FFEL Program Loan Receivables, Net        10,671                      10,786

  Perkins Program Loan Receivables, Net     194                         195

  Facilities and Other Loan Receivables,    354                         350
  Net                                                                   

  **Credit Program Receivables, Net**       **\$                        **\$ 97,965**
                                            104,966**                   
  ----------------------------------------- ------------- -- ---------- -------------

The following schedules summarize the direct and defaulted FFEL loan
principal and related interest receivable, net or inclusive of the
allowance for subsidy.

  -------------------------------------- --------------- ----------- --------------
  **Direct Loan Program Receivables**                                

  **[*(Dollars in                        **2004**                    **2003**
  Millions*)]{.underline}**                                          

  Principal Receivable                   \$ 89,245       []{.mark}   \$ 84,520

  Interest Receivable                    2,858           []{.mark}   2,771

  **Receivables**                        **92,103**      []{.mark}   **87,291**

  Less: Allowance for Subsidy            (1,644)         []{.mark}   657

  **Credit Program Receivables, Net**    **\$ 93,747**   []{.mark}   **\$ 86,634**
  -------------------------------------- --------------- ----------- --------------

Of the \$92.1 billion in Direct Loan receivables as of September 30,
2004, \$6.3 billion are currently in default and held at the
Department's Borrowers Services Collections Group. As of September 30,
2003, \$5.6 billion were in default and held at the Department's
Borrowers Services Collections Group out of a total receivable of \$87.3
billion.

+-------------------+-------+-------+-------+---+------+-------+------+
| **FFEL Program    |       |       |       |   |      |       |      |
| Receivables**     |       |       |       |   |      |       |      |
+-------------------+-------+-------+-------+---+------+-------+------+
|                   | **2   |       |       |   | **20 |       |      |
|                   | 004** |       |       |   | 03** |       |      |
+-------------------+-------+-------+-------+---+------+-------+------+
| ***[(Dollars in   | **    | **P   | **To  |   | **Pr | **P   | *    |
| Millions          | Pre-1 | ost-1 | tal** |   | e-19 | ost-1 | *Tot |
| )]{.underline}*** | 992** | 991** |       |   | 92** | 991** | al** |
+-------------------+-------+-------+-------+---+------+-------+------+
| Principal         | \$    | \$    | \$    | [ | \$   | \$    | \$   |
| Receivable        | 1     | 7,247 | 1     | ] | 10   | 7,119 | 17   |
|                   | 0,324 |       | 7,571 | { | ,555 |       | ,674 |
|                   |       |       |       | . |      |       |      |
|                   |       |       |       | m |      |       |      |
|                   |       |       |       | a |      |       |      |
|                   |       |       |       | r |      |       |      |
|                   |       |       |       | k |      |       |      |
|                   |       |       |       | } |      |       |      |
+-------------------+-------+-------+-------+---+------+-------+------+
| Interest          | 857   | 1,580 | 2,437 | [ | 1    | 1,553 | 2    |
| Receivable        |       |       |       | ] | ,144 |       | ,697 |
|                   |       |       |       | { |      |       |      |
|                   |       |       |       | . |      |       |      |
|                   |       |       |       | m |      |       |      |
|                   |       |       |       | a |      |       |      |
|                   |       |       |       | r |      |       |      |
|                   |       |       |       | k |      |       |      |
|                   |       |       |       | } |      |       |      |
+-------------------+-------+-------+-------+---+------+-------+------+
| #### Receivables  | **11, | **8,  | **20, | [ | **   | **8,  | **   |
|                   | 181** | 827** | 008** | ] | 11,6 | 672** | 20,3 |
|                   |       |       |       | { | 99** |       | 71** |
|                   |       |       |       | . |      |       |      |
|                   |       |       |       | m |      |       |      |
|                   |       |       |       | a |      |       |      |
|                   |       |       |       | r |      |       |      |
|                   |       |       |       | k |      |       |      |
|                   |       |       |       | } |      |       |      |
+-------------------+-------+-------+-------+---+------+-------+------+
| Less: Allowance   | 7,921 | 1,416 | 9,337 | [ | 8    | 1,312 | 9    |
| for Subsidy       |       |       |       | ] | ,273 |       | ,585 |
|                   |       |       |       | { |      |       |      |
|                   |       |       |       | . |      |       |      |
|                   |       |       |       | m |      |       |      |
|                   |       |       |       | a |      |       |      |
|                   |       |       |       | r |      |       |      |
|                   |       |       |       | k |      |       |      |
|                   |       |       |       | } |      |       |      |
+-------------------+-------+-------+-------+---+------+-------+------+
| **Credit Program  | **\$  | **\$  | **\$  | [ | **\$ | **\$  | **\$ |
| Receivables,      | 3,    | 7,    | 10,   | ] | 3,4  | 7,    | 10,7 |
| Net**             | 260** | 411** | 671** | { | 26** | 360** | 86** |
|                   |       |       |       | . |      |       |      |
|                   |       |       |       | m |      |       |      |
|                   |       |       |       | a |      |       |      |
|                   |       |       |       | r |      |       |      |
|                   |       |       |       | k |      |       |      |
|                   |       |       |       | } |      |       |      |
+-------------------+-------+-------+-------+---+------+-------+------+

Direct Loan Program Reconciliation of Allowance for Subsidy

The reconciliation of allowance for subsidy for the Direct Loan Program
follows:

+--------------------------------------------+----------+---+---------+
| ***[(Dollars in Millions)]{.underline}***  | **2004** |   | *       |
|                                            |          |   | *2003** |
+--------------------------------------------+----------+---+---------+
| **Beginning Balance, Allowance for         | **\$     |   | **\$    |
| Subsidy**                                  | 657**    |   | (2      |
|                                            |          |   | ,115)** |
+--------------------------------------------+----------+---+---------+
| **Components of Subsidy Transfers**        |          |   |         |
+--------------------------------------------+----------+---+---------+
| > Interest Rate Differential               | (1,276)  |   | (1,724) |
+--------------------------------------------+----------+---+---------+
| > Defaults, Net of Recoveries              | 390      |   | 613     |
+--------------------------------------------+----------+---+---------+
| > Fees                                     | \(401\)  |   | \(377\) |
+--------------------------------------------+----------+---+---------+
| > Other                                    | 1,117    |   | 1,122   |
+--------------------------------------------+----------+---+---------+
| **Current Year Subsidy Transfers**         | *        |   | **      |
|                                            | *(170)** |   | (366)** |
+--------------------------------------------+----------+---+---------+
| **Components of Subsidy Re-estimates**     |          |   |         |
+--------------------------------------------+----------+---+---------+
| > Interest Rate Re-estimates^1^            | (1,526)  |   | 388     |
+--------------------------------------------+----------+---+---------+
| > Technical and Default Re-estimates       | 1,153    |   | 4,694   |
+--------------------------------------------+----------+---+---------+
| **Total Subsidy Re-estimates**             | *        |   | **      |
|                                            | *(373)** |   | 5,082** |
+--------------------------------------------+----------+---+---------+
| **Activity**                               |          |   |         |
+--------------------------------------------+----------+---+---------+
| > Fee Collections                          | 450      |   | 408     |
+--------------------------------------------+----------+---+---------+
| > Loan Cancellations^2^                    | \(92\)   |   | \(104\) |
+--------------------------------------------+----------+---+---------+
| > Subsidy Allowance Amortization           | (1,815)  |   | (1,953) |
+--------------------------------------------+----------+---+---------+
| > Other                                    | \(301\)  |   | \(295\) |
+--------------------------------------------+----------+---+---------+
| **Total Activity**                         | **(      |   | **(1    |
|                                            | 1,758)** |   | ,944)** |
+--------------------------------------------+----------+---+---------+
| **Ending Balance, Allowance for Subsidy**  | **\$     |   | **\$**  |
|                                            | (        |   | **657** |
|                                            | 1,644)** |   |         |
+--------------------------------------------+----------+---+---------+

> ^1^ The interest rate re-estimate relates to subsidy associated with
> establishing a fixed rate for the Department's borrowing from
> Treasury.
>
> ^2^ Loan cancellations include write-offs of loans because the primary
> borrower died, became disabled, or declared bankruptcy.

FFEL Program Reconciliation of Liabilities for Loan Guarantees

Liabilities for Loan Guarantees represent the present value of future
projected cash outflows from the Department, net of inflows, such as
fees, and collection of principal and interest on defaulted guaranteed
loans assumed for direct collection.

The FFEL Program Liability for Loan Guarantees reconciliation is
associated with the FFEL Program loans guaranteed in the financing
account. The FFEL liquidating account liability for loan guarantees is
included in the total Liabilities for Loan Guarantees.

+----------------------------------------------+----------+---+---------+
| *[(Dollars in Millions)]{.underline}*        | 2004     |   | 2003    |
+----------------------------------------------+----------+---+---------+
| Beginning Balance, Liability for Loan        | \$       |   | \$      |
| Guarantees                                   | 15,310   |   | 11,571  |
+----------------------------------------------+----------+---+---------+
| Components of Subsidy Transfers              |          |   |         |
+----------------------------------------------+----------+---+---------+
| > Interest Supplement Costs^1^               | 10,087   |   | 5,569   |
+----------------------------------------------+----------+---+---------+
| > Defaults, Net of Recoveries                | 888      |   | 1,398   |
+----------------------------------------------+----------+---+---------+
| > Fees                                       | (4,230)  |   | (3,181) |
+----------------------------------------------+----------+---+---------+
| > Other^2^                                   | 2,151    |   | 2,087   |
+----------------------------------------------+----------+---+---------+
| Current Year Subsidy Transfers               | 8,896    |   | 5,873   |
+----------------------------------------------+----------+---+---------+
| #### Components of Subsidy Re-estimates      | ####     | # | ####    |
|                                              |          | # |         |
|                                              |          | # |         |
|                                              |          | # |         |
|                                              |          |   |         |
+----------------------------------------------+----------+---+---------+
| > Interest Rate Re-estimates                 | 70       |   | 4       |
+----------------------------------------------+----------+---+---------+
| > Technical and Default Re-estimates         | (1,449)  |   | (2,534) |
+----------------------------------------------+----------+---+---------+
| **Subsidy Re-estimates in Liability**        | **(      |   | **(2    |
|                                              | 1,379)** |   | ,530)** |
+----------------------------------------------+----------+---+---------+
| #### Activity                                | ####     | # | ####    |
|                                              |          | # |         |
|                                              |          | # |         |
|                                              |          | # |         |
|                                              |          |   |         |
+----------------------------------------------+----------+---+---------+
| > Interest Supplement Payments               | (2,345)  |   | (2,088) |
+----------------------------------------------+----------+---+---------+
| > Claim Payments                             | (2,803)  |   | (2,834) |
+----------------------------------------------+----------+---+---------+
| > Fee Collections                            | 2,588    |   | 2,025   |
+----------------------------------------------+----------+---+---------+
| > Interest on Liability Balance              | 436      |   | 458     |
+----------------------------------------------+----------+---+---------+
| > Other^3^                                   | 2,511    |   | 2,835   |
+----------------------------------------------+----------+---+---------+
| **Total Activity**                           | **387**  |   | **396** |
+----------------------------------------------+----------+---+---------+
| #### E                                       | ####     | # | ####    |
| nding Balance, Liability for Loan Guarantees |   23,214 | # |  15,310 |
|                                              |          | # |         |
|                                              |          | # |         |
|                                              |          |   |         |
+----------------------------------------------+----------+---+---------+
| FFEL Liquidating Account Liability for Loan  | 115      |   | 122     |
| Guarantees                                   |          |   |         |
+----------------------------------------------+----------+---+---------+
| **Total Liabilities for Loan Guarantees**    | **\$     |   | **\$    |
|                                              | 23,329** |   | 1       |
|                                              |          |   | 5,432** |
+----------------------------------------------+----------+---+---------+

> ^1^ Increase in 2004 primarily results from costs associated with
> increased consolidation loan volume.
>
> ^2^ Subsidy primarily associated with debt collections and loan
> cancellations due to death, disability, and bankruptcy.
>
> ^3^ Activity primarily associated with the transfer of subsidy for
> defaults; loan consolidation activity; and loan cancellations due to
> death, disability, and bankruptcy.

Subsidy Expense

Direct Loan and FFEL program subsidy expenses were as follows:

+----------------------------------------------+---------+---+----------+
| ## Direct Loan Program Subsidy Expense       |         |   |          |
+----------------------------------------------+---------+---+----------+
| ***[(Dollars in Millions)]{.underline}***    | *       |   | **2003** |
|                                              | *2004** |   |          |
+----------------------------------------------+---------+---+----------+
| Components of Current-Year Subsidy Transfers |         |   |          |
+----------------------------------------------+---------+---+----------+
| > Interest Rate Differential                 | \$      | [ | \$       |
|                                              | (1,276) | ] | (1,724)  |
|                                              |         | { |          |
|                                              |         | . |          |
|                                              |         | m |          |
|                                              |         | a |          |
|                                              |         | r |          |
|                                              |         | k |          |
|                                              |         | } |          |
+----------------------------------------------+---------+---+----------+
| > Defaults, Net of Recoveries                | 390     | [ | 613      |
|                                              |         | ] |          |
|                                              |         | { |          |
|                                              |         | . |          |
|                                              |         | m |          |
|                                              |         | a |          |
|                                              |         | r |          |
|                                              |         | k |          |
|                                              |         | } |          |
+----------------------------------------------+---------+---+----------+
| > Fees                                       | \(401\) | [ | \(377\)  |
|                                              |         | ] |          |
|                                              |         | { |          |
|                                              |         | . |          |
|                                              |         | m |          |
|                                              |         | a |          |
|                                              |         | r |          |
|                                              |         | k |          |
|                                              |         | } |          |
+----------------------------------------------+---------+---+----------+
| > Other                                      | 1,117   | [ | 1,122    |
|                                              |         | ] |          |
|                                              |         | { |          |
|                                              |         | . |          |
|                                              |         | m |          |
|                                              |         | a |          |
|                                              |         | r |          |
|                                              |         | k |          |
|                                              |         | } |          |
+----------------------------------------------+---------+---+----------+
| **Current Year Subsidy Transfers**           | **      | [ | *        |
|                                              | (170)** | ] | *(366)** |
|                                              |         | { |          |
|                                              |         | . |          |
|                                              |         | m |          |
|                                              |         | a |          |
|                                              |         | r |          |
|                                              |         | k |          |
|                                              |         | } |          |
+----------------------------------------------+---------+---+----------+
| > Re-estimates                               | \(373\) | [ | 5,082    |
|                                              |         | ] |          |
|                                              |         | { |          |
|                                              |         | . |          |
|                                              |         | m |          |
|                                              |         | a |          |
|                                              |         | r |          |
|                                              |         | k |          |
|                                              |         | } |          |
+----------------------------------------------+---------+---+----------+
| **Direct Loan Subsidy Expense**              | **\$    | [ | **\$     |
|                                              | (543)** | ] | 4,716**  |
|                                              |         | { |          |
|                                              |         | . |          |
|                                              |         | m |          |
|                                              |         | a |          |
|                                              |         | r |          |
|                                              |         | k |          |
|                                              |         | } |          |
+----------------------------------------------+---------+---+----------+

Direct Loan subsidy expense was reduced by \$373 million by the 2004
re-estimates. The re-estimate related to changes in actual and
forecasted interest rates reduced subsidy expense by \$847 million. The
re-estimate related to changes in assumptions for other variables, such
as assumed term and maturity, loan volume, and prepayment rates
increased subsidy expense by \$474 million. A one percent increase in
projected borrower base rates would reduce projected Direct Loan costs
by \$775 million.

+---------------------------------------------+----------+---+---------+
| > **FFEL Program Loan Guarantee Subsidy     |          |   |         |
| > Expense**                                 |          |   |         |
+---------------------------------------------+----------+---+---------+
| ### *[(Dollars in Millions)]{.underline}*   | **2004** |   | *       |
|                                             |          |   | *2003** |
+---------------------------------------------+----------+---+---------+
| **Components of Current-Year Subsidy        |          |   |         |
| Transfers**                                 |          |   |         |
+---------------------------------------------+----------+---+---------+
| > Interest Supplement Costs                 | \$       | [ | \$      |
|                                             | 10,087   | ] | 5,569   |
|                                             |          | { |         |
|                                             |          | . |         |
|                                             |          | m |         |
|                                             |          | a |         |
|                                             |          | r |         |
|                                             |          | k |         |
|                                             |          | } |         |
+---------------------------------------------+----------+---+---------+
| > Defaults, Net of Recoveries               | 888      | [ | 1,398   |
|                                             |          | ] |         |
|                                             |          | { |         |
|                                             |          | . |         |
|                                             |          | m |         |
|                                             |          | a |         |
|                                             |          | r |         |
|                                             |          | k |         |
|                                             |          | } |         |
+---------------------------------------------+----------+---+---------+
| > Fees                                      | (4,230)  | [ | (3,181) |
|                                             |          | ] |         |
|                                             |          | { |         |
|                                             |          | . |         |
|                                             |          | m |         |
|                                             |          | a |         |
|                                             |          | r |         |
|                                             |          | k |         |
|                                             |          | } |         |
+---------------------------------------------+----------+---+---------+
| > Other                                     | 2,151    | [ | 2,087   |
|                                             |          | ] |         |
|                                             |          | { |         |
|                                             |          | . |         |
|                                             |          | m |         |
|                                             |          | a |         |
|                                             |          | r |         |
|                                             |          | k |         |
|                                             |          | } |         |
+---------------------------------------------+----------+---+---------+
| **Current Year Subsidy Transfers**          | *        | [ | **      |
|                                             | *8,896** | ] | 5,873** |
|                                             |          | { |         |
|                                             |          | . |         |
|                                             |          | m |         |
|                                             |          | a |         |
|                                             |          | r |         |
|                                             |          | k |         |
|                                             |          | } |         |
+---------------------------------------------+----------+---+---------+
| > Re-estimates                              | \(380\)  | [ | (3,365) |
|                                             |          | ] |         |
|                                             |          | { |         |
|                                             |          | . |         |
|                                             |          | m |         |
|                                             |          | a |         |
|                                             |          | r |         |
|                                             |          | k |         |
|                                             |          | } |         |
+---------------------------------------------+----------+---+---------+
| **FFEL Loan Guarantee Subsidy Expense**     | **\$     | [ | **\$    |
|                                             | 8,516**  | ] | 2,508** |
|                                             |          | { |         |
|                                             |          | . |         |
|                                             |          | m |         |
|                                             |          | a |         |
|                                             |          | r |         |
|                                             |          | k |         |
|                                             |          | } |         |
+---------------------------------------------+----------+---+---------+

FFEL subsidy expense was reduced by \$380 million by the 2004
re-estimates. The re-estimate related to changes in actual and
forecasted interest rates reduced subsidy expense by \$352 million. The
re-estimate related to changes in assumptions for other variables, such
as assumed term and maturity, loan volume, and prepayment rates reduced
subsidy expense by \$28 million. A one percent increase in borrower
interest rates and the guaranteed yield for lenders would increase
projected FFEL costs by \$4.2 billion.

Subsidy Rates

The subsidy rates applicable to the 2004 loan cohort year were as
follows:

  -------------------- ---------------- -------------- ---------- ----------- -----------
  **Subsidy Rates -                                                           
  Cohort 2004**                                                               

                       **Interest       **Defaults**   **Fees**   **Other**   **Total**
                       Differential**                                         

  Direct Loan Program  (5.65%)          1.74%          (1.97%)    5.26%       (0.62%)

                       **Interest       **Defaults**   **Fees**   **Other**   **Total**
                       Supplements**                                          

  FFEL Program         13.33%           1.06%          (5.56%)    2.78%       11.61%
  -------------------- ---------------- -------------- ---------- ----------- -----------

The subsidy rates disclosed pertain only to the cohort listed. These
rates cannot be applied to direct or guaranteed loans disbursed during
the current reporting year to yield the subsidy expense. The subsidy
expense for new direct or guaranteed loans reported in the current year
relate to disbursements of loans from both current and prior years'
cohorts. Subsidy expense is recognized when direct loans are disbursed
by the Department or third-party lenders disburse guaranteed loans. The
costs of the Department's student loan programs, and especially the
Direct Loan program, are highly sensitive to changes in actual and
forecasted interest rates. Rates are established in statute; the
existing loan portfolio has a mixture of borrower and lender rate
formulae. Governmentwide interest rate projections are developed by the
President's Office of Management and Budget.

New student and parent loans have variable interest rates, reset
annually. The federal capital for Direct Loans is provided annually by
the Treasury at a fixed interest rate. Borrowers may consolidate
outstanding loans into a single loan with a fixed interest rate based on
the interest rates of the original loans. Borrower interest rates differ
from the rate at which the Department borrows from Treasury. When
developing subsidy cost estimates, the Department considers the impact
of future interest rate changes on program costs and as part of the
re-estimate process, annually adjusts subsidy costs. Changes in interest
rate assumptions decreased the re-estimate for Direct Loans by \$847
million in 2004 and increased the re-estimate by \$1.3 billion in 2003.
For FFEL, interest rates assumption changes reduced the re-estimate by
\$352 million and \$768 million in 2004 and 2003, respectively.

Administrative Expenses

The administrative expenses for Direct Loan and FFEL Programs were as
follows:

  --------------------------- --------------------- -- ------------------------ -- -- --------------------- -- ------------------------
                              **2004**                                                **2003**                 

  ***[(Dollars in             **[Direct                **[FFEL]{.underline}**         **[Direct                **[FFEL]{.underline}**
  Millions)]{.underline}***   Loan]{.underline}**                                     Loan]{.underline}**      

  Operating Expense           \$ 409                   \$ 281                         \$ 358                   \$ 271

  Other Expense               10                       \-                             10                       2

  **Total Administrative      **\$** **419**           **\$** **281**                 **\$** **368**           **\$** **273**
  Expenses**                                                                                                   
  --------------------------- --------------------- -- ------------------------ -- -- --------------------- -- ------------------------

Perkins Loan Program

The Perkins Loan Program is a campus-based program providing financial
assistance to eligible postsecondary school students. For each fiscal
year 2004 and 2003, the Department provided capital contributions of
\$99 million used to make loans to eligible students through
participating schools at five percent interest. For certain defaulted
loans, the Department reimburses the originating school and collects
from the borrowers. At September 30, 2004 and 2003, loans receivable,
net of an allowance for loss, was \$194 million and \$195 million,
respectively. These loans, originally disbursed as grants, are valued at
historical cost.

Facilities Loan Programs

The Department administers the College Housing and Academic Facilities
Loans (CHAFL), College Housing Loans (CHL), and Higher Education
Facilities Loans (HEFL) Programs. 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. Since 1998, no new loans have been
authorized.

The Department also administers the Historically Black Colleges and
Universities (HBCU) Capital Financing Program. Since 1992, this program
has given HBCUs access to financing for the repair, renovation, and, in
exceptional circumstances, the construction or acquisition of
facilities, equipment, and infrastructure through federally insured
bonds. The Department has authorized a designated bonding authority to
make the loans to eligible institutions, charge interest, and collect
principal and interest payments. In compliance with statute, the bonding
authority maintains an escrow account to pay the principal and interest
on bonds for loans in default.

The credit program receivables were as follows:

  ----------------------------------------- ------------- --- ------------
  ***[(Dollars in Millions)]{.underline}*** **2004**          **2003**

  Principal Receivable                      \$ 452            \$ 449

  Interest Receivable                       6                 8

  **Receivables**                           **458**           **457**

  Less: Allowance for Subsidy               104               107

  **Credit Program Receivables, Net**       **\$ 354**        **\$ 350**
  ----------------------------------------- ------------- --- ------------

Note 5. Accounts Receivable

Accounts receivable consisted of the following at September 30, 2004 and
2003:

  --------------------------- --------------- ----------- --------------- ----------- ---------------
                              **2004**                                                

  *[(Dollars in               **Gross                     **Allowance**               **Net
  Millions)]{.underline}*     Receivables**                                           Receivables**

                                                                                      

  Intragovernmental           \$ 3            []{.mark}   \$ -            []{.mark}   \$ 3

  With the Public             377             []{.mark}   \(225\)         []{.mark}   152

  Total Accounts Receivable   **\$** **380**  []{.mark}   **\$ (225)**    []{.mark}   **\$** **155**
  --------------------------- --------------- ----------- --------------- ----------- ---------------

  --------------------------- --------------- ----------- --------------- ----------- ---------------
                              **2003**                                                

  *[(Dollars in               **Gross                     **Allowance**               **Net
  Millions)]{.underline}*     Receivables**                                           Receivables**

                                                                                      

  Intragovernmental           \$ 4            []{.mark}   \$ -            []{.mark}   \$ 4

  With the Public             460             []{.mark}   \(281\)         []{.mark}   179

  Total Accounts Receivable   **\$** **464**  []{.mark}   **\$ (281)**    []{.mark}   **\$** **183**
  --------------------------- --------------- ----------- --------------- ----------- ---------------

Accounts receivable represent balances due from recipients of grant and
other financial assistance programs, and reimbursable agreements from
other federal agencies. They are recorded at their estimated net
realizable value. Estimates for the allowance for loss on uncollectible
accounts are based on historical data.

Note 6. General Property, Plant and Equipment

General property, plant and equipment consisted of the following at
September 30, 2004 and 2003:

  ------------------------------------- ---------- -- ---------------- -- ---------
                                        **2004**                          

  *[(Dollars in Millions)]{.underline}* **Asset       **Accumulated       **Net
                                        Cost**        Depreciation**      Asset
                                                                          Value**

                                                                          

  IT Equipment and Software             \$ 76         \$ (57)             \$ 19

  Furniture and Fixtures                3             \(1\)               2

  Total General Property, Plant and     **\$**        **\$ (58)**         **\$ 21**
  Equipment                             **79**                            
  ------------------------------------- ---------- -- ---------------- -- ---------

  ------------------------------------- ---------- -- ---------------- -- ---------
                                        **2003**                          

  *[(Dollars in Millions)]{.underline}* **Asset       **Accumulated       **Net
                                        Cost**        Depreciation**      Asset
                                                                          Value**

                                                                          

  IT Equipment and Software             \$ 65         \$ (38)             \$ 27

  Furniture and Fixtures                2             \(1\)               1

  Total General Property, Plant and     **\$**        **\$ (39)**         **\$**
  Equipment                             **67**                            **28**
  ------------------------------------- ---------- -- ---------------- -- ---------

Information Technology (IT) Equipment consists of computer hardware and
related software. The majority of these costs represent the continuing
acquisition and implementation of the financial accounting system and
includes Potomac Center Plaza (PCP) phone system. Furniture and fixtures
and building improvements are related to renovating and furnishing new
quarters for FSA and PCP.

Leases

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, but rather expensed as incurred. Estimated
future minimum lease payments for privately owned buildings as of
September 30, 2004 and 2003, were as follows:

  --------------------------- --------------- ---- --------------------------- --------------
  **2004**                                         **2003**                    

  ***[(Dollars in                                  ***[(Dollars in             
  Millions)]{.underline}***                        Millions)]{.underline}***   

  **Fiscal Year**             **Lease              **Fiscal Year**             **Lease
                              Payment**                                        Payment**

  2005                        \$ 46                2004                        \$ 32

  2006                        55                   2005                        47

  2007                        61                   2006                        51

  2008                        63                   2007                        55

  2009                        64                   2008                        56

  After 2009                  66                   After 2008                  51

  **Total**                   **\$** **355**       Total                       **\$** **292**
  --------------------------- --------------- ---- --------------------------- --------------

Note 7. Treasury Debt

At September 30, 2004, the Department's Debt to the Treasury and the
Federal Financing Bank (FFB) was \$96,531 million and \$118 million,
respectively. The table below depicts the change in debt from October 1,
2003 to September 30, 2004:

  --------------------------- -------------- -- -------------- -- ----------- ---------- --- --------- -- -----------
                              **2004**                                                                    

                              **Treasury**                                                                

  ***[(Dollars in             **Direct          **Facilities      **Total**                  **FFB**      **Total**
  Millions)]{.underline}***   Student           Loans**                                                   
                              Loans**                                                                     

  Beginning Balance           \$ 91,787         \$ 151            \$ 91,938                  \$ 80        \$ 92,018

  Accrued Interest            1                 \-                1                          2            3

  New Borrowing               21,191            \-                21,191                     53           21,244

  Repayments                  (16,558)          \(41\)                        (16,599)       \(17\)       (16,616)

  **Ending Balance**          **\$ 96,421**     **\$ 110**        **\$                       **\$         **\$
                                                                  96,531**                   118**        96,649**
  --------------------------- -------------- -- -------------- -- ----------- ---------- --- --------- -- -----------

At September 30, 2003, the Department's Debt to the Treasury and FFB was
\$91,938 million and \$80 million, respectively. The table below depicts
the change in debt from October 1, 2002 to September 30, 2003:

  --------------------------- -------------- -- -------------- -- ----------- -- --------- -- -----------
                              **2003**                                                        

                              **Treasury**                                                    

  ***[(Dollars in             **Direct          **Facilities      **Total**      **FFB**      **Total**
  Millions)]{.underline}***   Student           Loans**                                       
                              Loans**                                                         

  Beginning Balance           \$ 89,498         \$ 215            \$ 89,713      \$ 69        \$ 89,782

  Accrued Interest            \-                \-                \-             1            1

  New Borrowing               19,637            \-                19,637         11           19,648

  Repayments                  (17,348)          \(64\)            (17,412)       \(1\)        (17,413)

  **Ending Balance**          **\$ 91,787**     **\$ 151**        **\$           **\$ 80**    **\$
                                                                  91,938**                    92,018**
  --------------------------- -------------- -- -------------- -- ----------- -- --------- -- -----------

Funds were borrowed to provide funding for direct loans to students and
facilities loan programs. In addition, the FFB holds bonds issued by the
Department on behalf of the HBCU Capital Financing Program. The
Department reports the corresponding liability for full payment of
principal and accrued interest as a payable to the FFB under rules
established by the Credit Reform Act of 1990.

The level of repayments on borrowings to Treasury is derived from many
factors:

-   Beginning-of-the-year cash balance, collections, borrowings,
    interest revenue, disbursements, and interest expense have an impact
    on the available cash to repay Treasury.

-   Cash is held to cover future liabilities, such as contract
    collection costs and disbursements in transit.

Note 8. Payable to Treasury

At September 30, 2004 and 2003, Payable to the Treasury for estimated
liquidating fund future cash inflows in excess of outflows and for
downward re-estimates of subsidy is shown in the table below:

+------------------------------------------------+---------+---+--------+
| ***[(Dollars In Millions)]{.underline}***      | *       |   | **     |
|                                                | *2004** |   | 2003** |
+------------------------------------------------+---------+---+--------+
| Future Liquidating Account Collections,        | \$      |   | \$     |
| Beginning Balance                              | 3,761   |   | 2,007  |
+------------------------------------------------+---------+---+--------+
| > Valuation of Pre-92 Loan Liability and       | 847     |   | 3,542  |
| > Allowance                                    |         |   |        |
+------------------------------------------------+---------+---+--------+
| > Capital Transfers to Treasury                | (1,117) |   | (      |
|                                                |         |   | 1,788) |
+------------------------------------------------+---------+---+--------+
| **Future Liquidating Account Collections,      | **      |   | **3    |
| Ending Balance**                               | 3,491** |   | ,761** |
+------------------------------------------------+---------+---+--------+
| FFEL Downward Subsidy Re-estimate              | 1,502   |   | 3,262  |
+------------------------------------------------+---------+---+--------+
| **Total Payable to Treasury**                  | **\$    |   | **\$   |
|                                                | 4,993** |   | 7      |
|                                                |         |   | ,023** |
+------------------------------------------------+---------+---+--------+

In accordance with the Credit Reform Act, the liquidating fund pays
monies to Treasury each year based on available fund balances, and the
FFEL financing fund pays the liability related to downward subsidy
re-estimates, upon budget execution.

Note 9. Other Liabilities

Other liabilities include current liabilities for contractual services,
administrative services, deferred credits, liability for deposit funds,
contingent liabilities, custodial liabilities, and the liability for
unfunded accrued annual leave. Additionally, the non-current liabilities
include accrued unfunded FECA. Other liabilities consisted of the
following at September 30, 2004 and 2003:

+----------------------------------------+-------------+---+-----------+
| #                                      | **2004**    | [ | **2003**  |
|  *[(Dollars in Millions)]{.underline}* |             | ] |           |
|                                        |             | { |           |
|                                        |             | . |           |
|                                        |             | m |           |
|                                        |             | a |           |
|                                        |             | r |           |
|                                        |             | k |           |
|                                        |             | } |           |
+----------------------------------------+-------------+---+-----------+
| Intragovernmental                      | []{.mark}   | [ | []{.mark} |
|                                        |             | ] |           |
|                                        |             | { |           |
|                                        |             | . |           |
|                                        |             | m |           |
|                                        |             | a |           |
|                                        |             | r |           |
|                                        |             | k |           |
|                                        |             | } |           |
+----------------------------------------+-------------+---+-----------+
| Accrued Unfunded FECA Liability        | \$ 3        |   | \$ 3      |
+----------------------------------------+-------------+---+-----------+
| Liability for Deposit Funds            | \(21\)      |   | 46        |
+----------------------------------------+-------------+---+-----------+
| Advance From Others                    | 22          |   | 56        |
+----------------------------------------+-------------+---+-----------+
| Total Intragovernmental                | **4**       |   | **105**   |
+----------------------------------------+-------------+---+-----------+
| With the Public                        |             |   |           |
+----------------------------------------+-------------+---+-----------+
| Accrued Payroll and Benefits           | 15          |   | 12        |
+----------------------------------------+-------------+---+-----------+
| Accrued Unfunded Annual Leave          | 30          |   | 29        |
+----------------------------------------+-------------+---+-----------+
| Custodial Liability                    | 206         |   | 220       |
+----------------------------------------+-------------+---+-----------+
| Deferred Credits                       | 1           |   | 7         |
+----------------------------------------+-------------+---+-----------+
| Liability for Deposit Funds            | 30          |   | 36        |
+----------------------------------------+-------------+---+-----------+
| Other                                  | 99          |   | 146       |
+----------------------------------------+-------------+---+-----------+
| Total With the Public                  | **381**     |   | **450**   |
+----------------------------------------+-------------+---+-----------+
| Total Other Liabilities                | **\$**      |   | **\$**    |
|                                        | **385**     |   | **555**   |
+----------------------------------------+-------------+---+-----------+

Note 10. Liabilities Not Covered by Budgetary Resources

Liabilities on the Department's Balance Sheet as of September 30, 2004
and 2003, include liabilities for which congressional action is needed
before budgetary resources can be provided. Although future
appropriations to fund these liabilities are likely and anticipated, it
is not certain that appropriations will be enacted to fund these
liabilities. Liabilities not covered by budgetary resources consisted of
the following at September 30, 2004 and 2003:

  ------------------------------------------------ ------------- ----------- -------------
  ***[(Dollars in Millions)]{.underline}***        **2004**      []{.mark}   **2003**

  **Intragovernmental**                                                      

  Accrued Unfunded FECA Liability                  \$ 3                      \$ 3

  Total Intragovernmental                          3                         3

  With the Public                                                            

  Custodial Liability                              206                       220

  Accrued Unfunded Annual Leave                    30                        29

  Federal Employee and Veterans' Benefits          19                        22

  Total With the Public                            255                       271

  Liabilities Not Covered by Budgetary Resources   **258**                   **274**

  Liabilities Covered by Budgetary Resources       **128,017**               **117,549**

  Total Liabilities                                **\$                      **\$
                                                   128,275**                 117,823**
  ------------------------------------------------ ------------- ----------- -------------

Note 11. Accrued Grant Liability

The accrued grant liability by reporting groups are shown in the table
below. (See Note 1.)

  --------------------------------------- ------------- --- --------------
  ***[(Dollars in                         **2004**          **2003**
  Millions)]{.underline}***                                 

  FSA                                     \$ 637            \$ 551

  OESE                                    207               256

  OSERS                                   158               250

  OVAE                                    39                57

  OPE                                     242               169

  IES                                     10                52

  OELA                                    30                31

  OSDFS                                   3                 \-

  OII                                     35                \-

  Total Accrued Grant Liability           **\$ 1,361**      **\$ 1,366**
  --------------------------------------- ------------- --- --------------

Note 12. Net Position

The nature of the Department's net position was discussed in Note 1, and
the components are set forth in the Statement of Changes in Net
Position. The table below reports the composition of appropriations that
have not been used to fund goods and services received or benefits
provided as of September 30, 2004 and 2003:

  -------------------------------------- ----------------- -- ------------
  ***[(Dollars in                        **2004**             **2003**
  Millions)]{.underline}***                                   

  Unobligated Balances                                        

  Available                              \$    619            \$ 2,979

  Not Available                          280                  357

  Undelivered Orders                     46,386               40,595

  Total Unexpended Appropriations        **\$ 47,285**        **\$
                                                              43,931**
  -------------------------------------- ----------------- -- ------------

Undelivered orders and unobligated balances for federal credit financing
and liquidating funds, and trust funds are not included in the chart
above because they are not funded through appropriations. As a result,
unobligated and undelivered order balances in the chart above will
differ from these balances in the Combined Statement of Budgetary
Resources.

The Department had Cumulative Results of Operations of (\$2,951) million
as of September 30, 2004, and (\$4,496) million as of September 30,
2003. Cumulative Results of Operations arise from unfunded expenses and
capital purchases.

Note 13. Interest Revenue and Expense

For the Direct Loan Program, non-federal interest revenue is earned on
the individual non-defaulted loans in the loan portfolio while federal
interest is earned on the uninvested fund balances with Treasury. For
the Direct Loan Program, interest expense is incurred on the
Department's borrowings from Treasury. For the FFEL program, federal
interest revenue is earned on the uninvested fund balance with Treasury
in the financing fund. Program A, Enhancement of Postsecondary and Adult
Education includes the Direct Loan Program and the FFEL Program.

The interest revenues and expenses directly attributable to the Direct
Loan Program, the FFEL Program, and other remaining programs are
summarized below as of September 30, 2004 and 2003:

<table style="width:100%;">
<colgroup>
<col style="width: 19%" />
<col style="width: 0%" />
<col style="width: 10%" />
<col style="width: 9%" />
<col style="width: 0%" />
<col style="width: 2%" />
<col style="width: 0%" />
<col style="width: 8%" />
<col style="width: 6%" />
<col style="width: 0%" />
<col style="width: 2%" />
<col style="width: 0%" />
<col style="width: 9%" />
<col style="width: 7%" />
<col style="width: 0%" />
<col style="width: 2%" />
<col style="width: 0%" />
<col style="width: 9%" />
<col style="width: 10%" />
</colgroup>
<tbody>
<tr class="odd">
<td></td>
<td colspan="3"><p id="direct-student-loans"
class="heading"><strong>Direct Student Loans</strong></p></td>
<td colspan="3"></td>
<td colspan="2"><strong>FFEL Program</strong></td>
<td colspan="2"></td>
<td colspan="3"><strong>Other Programs</strong></td>
<td colspan="2"></td>
<td colspan="3"><strong>Total</strong></td>
</tr>
<tr class="even">
<td colspan="2"><em><strong><u>(Dollars in
Millions)</u></strong></em></td>
<td><strong>2004</strong></td>
<td colspan="2"><strong>2003</strong></td>
<td></td>
<td colspan="2"><strong>2004</strong></td>
<td colspan="2"><strong>2003</strong></td>
<td colspan="2"></td>
<td><strong>2004</strong></td>
<td colspan="2"><strong>2003</strong></td>
<td colspan="2"></td>
<td><strong>2004</strong></td>
<td><strong>2003</strong></td>
</tr>
<tr class="odd">
<td colspan="2"><strong>Interest Revenue:</strong></td>
<td></td>
<td colspan="2"></td>
<td></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td colspan="2">Federal</td>
<td>$ 1,000</td>
<td colspan="2">$ 1,076</td>
<td></td>
<td colspan="2">$ 436</td>
<td colspan="2">$ 458</td>
<td colspan="2"></td>
<td>$ -</td>
<td colspan="2">$ -</td>
<td colspan="2"></td>
<td>$ 1,436</td>
<td>$ 1,534</td>
</tr>
<tr class="odd">
<td colspan="2">Non-federal</td>
<td>4,761</td>
<td colspan="2">4,954</td>
<td></td>
<td colspan="2">-</td>
<td colspan="2">-</td>
<td colspan="2"></td>
<td>50</td>
<td colspan="2">30</td>
<td colspan="2"></td>
<td>4,811</td>
<td>4,984</td>
</tr>
<tr class="even">
<td colspan="2"><strong>Total Interest Revenue</strong></td>
<td><strong>$ 5,761</strong></td>
<td colspan="2"><strong>$ 6,030</strong></td>
<td></td>
<td colspan="2"><strong>$</strong> <strong>436</strong></td>
<td colspan="2"><strong>$</strong> <strong>458</strong></td>
<td colspan="2"></td>
<td><strong>$</strong> <strong>50</strong></td>
<td colspan="2"><strong>$</strong> <strong>30</strong></td>
<td colspan="2"></td>
<td><strong>$ 6,247</strong></td>
<td><strong>$ 6,518</strong></td>
</tr>
<tr class="odd">
<td colspan="2"><strong>Interest Expense:</strong></td>
<td></td>
<td colspan="2"></td>
<td></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td></td>
<td></td>
</tr>
<tr class="even">
<td colspan="2">Federal</td>
<td>$ 5,761</td>
<td colspan="2">$ 6,030</td>
<td></td>
<td colspan="2">$ 436</td>
<td colspan="2">$ 458</td>
<td colspan="2"></td>
<td>$ 16</td>
<td colspan="2">$ 16</td>
<td colspan="2"></td>
<td>$ 6,213</td>
<td>$ 6,504</td>
</tr>
<tr class="odd">
<td colspan="2">Non-federal</td>
<td>-</td>
<td colspan="2">-</td>
<td></td>
<td colspan="2">-</td>
<td colspan="2">-</td>
<td colspan="2"></td>
<td>(3)</td>
<td colspan="2">-</td>
<td colspan="2"></td>
<td>(3)</td>
<td>-</td>
</tr>
<tr class="even">
<td colspan="2"><strong>Total Interest Expense</strong></td>
<td><strong>$ 5,761</strong></td>
<td colspan="2"><strong>$ 6,030</strong></td>
<td></td>
<td colspan="2"><strong>$ 436</strong></td>
<td colspan="2"><strong>$</strong> <strong>458</strong></td>
<td colspan="2"></td>
<td><strong>$ 13</strong></td>
<td colspan="2"><strong>$</strong> <strong>16</strong></td>
<td colspan="2"></td>
<td><strong>$ 6,210</strong></td>
<td><strong>$ 6,504</strong></td>
</tr>
</tbody>
</table>

Note 14. Statement of Budgetary Resources

The Statement of Budgetary Resources (SBR) compares budgetary resources
with the status of those resources. As of September 30, 2004, budgetary
resources were \$131,766 million and net outlays were \$61,660 million.
As of September 30, 2003, budgetary resources were \$118,321 million and
net outlays were \$58,166 million.

Apportionment Categories of Obligations Incurred

The Department receives apportionments of its resources from OMB.
Category A apportionments are those for 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.

The apportionment categories of obligations incurred as of September 30,
2004 and 2003, are summarized below:

  ---------------------------------------- ------------- --- --------------
  ***[(Dollars in                          **2004**          **2003**
  Millions)]{.underline}***                                  

  Direct:                                                    

  Category A                               \$ 1,279          \$ 1,244

  Category B                               112,970           101,840

  Exempt from Apportionment                53                62

                                           114,302           103,146

  Reimbursable:                                              

  Category A                               1                 8

  Category B                               4                 71

  Exempt from Apportionment                86                3

                                           91                82

  **Total Apportionment Categories of      **\$              **\$ 103,228**
  Obligations Incurred**                   114,393**         
  ---------------------------------------- ------------- --- --------------

Permanent Indefinite Budget Authority

The Federal Direct Loan and the Federal Family Education Loan Programs
were granted permanent indefinite budget authority through legislation.
Part D of the William D. Ford Federal Direct Loan Program and part B of
the Federal Family Education Loan Program, pursuant to the HEA, pertains
to the existence, purpose, and availability of this permanent indefinite
budget authority.

**Reauthorization of Legislation**

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

Unused Borrowing Authority

The Department is given authority to draw funds from the Treasury to
help finance the majority of its direct lending activity in accordance
with its needs. Unliquidated Borrowing Authority is considered a
budgetary resource and is available to support obligations. The
Department periodically reviews its borrowing authority balances and may
cancel unused amounts. Unused Borrowing Authority as of September 30,
2004 and 2003, was determined as follows:

  ------------------------------------------ ------------- -- ------------
  ***[(Dollars in Millions)]{.underline}***  **2004**         **2003**

  Beginning Balance, Unused Borrowing        \$ 6,978         \$ 4,953
  Authority                                                   

  Current Year Borrowing Authority           22,483           21,766

  Funds Drawn From Treasury                  (21,244)         (19,648)

  Prior Year Unused Borrowing Authority      (2,265)          \(93\)
  Cancelled                                                   

  **Ending Balance, Unused Borrowing         **\$ 5,952**     **\$ 6,978**
  Authority**                                                 
  ------------------------------------------ ------------- -- ------------

Comparison to the Budget of the United States Government

Statement of Federal Financial Accounting Standards No. 7 (SFFAS No. 7),
*Accounting for Revenue and Other Financing Sources and Concepts for
Reconciling Budgetary and Financial Accounting*, requires an explanation
of material differences between budgetary resources available, the
status of those resources and outlays as presented in the Statement of
Budgetary Resources to the related actual balances published in the
*Budget of the United States Government (Budget)*. However, the *Budget*
has not yet been published. The *Budget* is scheduled for publication in
February 2005 and will be available through OMB. Accordingly,
information required for such disclosure is not available at the time of
publication of these financial statements. There were no material
differences between the FY 2003 column on the Statement of Budgetary
Resources and the FY 2003 actual amounts reported in the *Budget*.

Note 15. Statement of Financing

The Statement of Financing (SOF) provides information on the total
resources used by an agency, both those received through budgetary
resources and those received through other means during the reporting
period. The statement reconciles these resources with the net cost of
operations by (1) removing resources that do not fund net cost of
operations and (2) including components of net cost of operations that
did not generate or use resources during the year.

The SOF is presented as a consolidated statement for the Department and
its major programs. Net interagency eliminations are presented for
proprietary amounts. The budgetary amounts are reported on a combined
basis as presented in the Statement of Budgetary Resources. Accordingly,
net interagency eliminations for budget amounts are not presented.

The relationship between the amounts reported as liabilities not covered
by budgetary resources on the Balance Sheet and amounts reported as
components requiring or generating resources in future periods on the
Statement of Financing were analyzed. The differences are primarily due
to the increase in custodial liability, which does not generate net cost
of operations or require the use of budgetary resources.

Other, in the components not requiring or generating resources for FY
2004, is primarily comprised of the subsidy expense recognized in FY
2003 that was not funded in FY 2004 for the Direct Loan program.

Note 16. Cost and Earned Revenue by Budget Function

The Department's gross costs and revenue, by budget function for
September 30, 2004 and 2003, are presented below:

<table style="width:100%;">
<colgroup>
<col style="width: 33%" />
<col style="width: 10%" />
<col style="width: 0%" />
<col style="width: 0%" />
<col style="width: 11%" />
<col style="width: 9%" />
<col style="width: 0%" />
<col style="width: 2%" />
<col style="width: 0%" />
<col style="width: 9%" />
<col style="width: 0%" />
<col style="width: 10%" />
<col style="width: 0%" />
<col style="width: 10%" />
</colgroup>
<tbody>
<tr class="odd">
<td></td>
<td colspan="6"><strong>2004</strong></td>
<td colspan="2"></td>
<td colspan="5"><strong>2003</strong></td>
</tr>
<tr class="even">
<td><em><strong><u>(Dollars in Millions)</u></strong></em></td>
<td colspan="3"><strong>Gross Costs</strong></td>
<td><strong>Earned Revenue</strong></td>
<td><strong>Net Costs</strong></td>
<td colspan="2"></td>
<td colspan="2"><strong>Gross Costs</strong></td>
<td colspan="2"><strong>Earned Revenue</strong></td>
<td colspan="2"><strong>Net Costs</strong></td>
</tr>
<tr class="odd">
<td>Education, Training Employment and Social Services</td>
<td>$ 70,062</td>
<td colspan="3">$ (6,564)</td>
<td>$ 63,498</td>
<td colspan="2"><mark></mark></td>
<td colspan="2"><p><mark></mark></p>
<p>$ 65,208</p></td>
<td colspan="2">$ (6,523)</td>
<td colspan="2">$ 58,685</td>
</tr>
<tr class="even">
<td>Administration of Justice</td>
<td>125</td>
<td colspan="3">-</td>
<td>125</td>
<td colspan="2"><mark></mark></td>
<td colspan="2">119</td>
<td colspan="2">-</td>
<td colspan="2">119</td>
</tr>
<tr class="odd">
<td><strong>Total</strong></td>
<td colspan="2"><strong>$ 70,187</strong></td>
<td colspan="2"><strong>$ (6,564)</strong></td>
<td colspan="2"><strong>$ 63,623</strong></td>
<td colspan="2"><mark></mark></td>
<td colspan="2"><strong>$ 65,327</strong></td>
<td colspan="2"><strong>$ (6,523)</strong></td>
<td><strong>$ 58,804</strong></td>
</tr>
</tbody>
</table>

The Department's intragovernmental gross costs and revenue, by budget
function for September 30, 2004 and 2003, are presented below:

  --------------------------- --------- ---------- ----------- --------- ----------- -- ---------- --------- ----------- ---------
                                        **2004**                                        **2003**                         

  ***[(Dollars in             **Gross              **Earned    **Net                               **Gross   **Earned    **Net
  Millions)]{.underline}***   Costs**              Revenue**   Costs**                             Costs**   Revenue**   Costs**

  Education, Training         \$ 6,536             \$ (1,738)  \$ 4,798  []{.mark}                 \$ 6,709  \$ (1,551)  \$ 5,158
  Employment and Social                                                                                                  
  Services                                                                                                               

  Administration of Justice   125                  \-          125       []{.mark}                 119       \-          119

  **Total**                   **\$                 **\$        **\$      []{.mark}                 **\$      **\$        **\$
                              6,661**              (1,738)**   4,923**                             6,828**   (1,551)**   5,277**
  --------------------------- --------- ---------- ----------- --------- ----------- -- ---------- --------- ----------- ---------

Note 17. Program Costs by Segment

The format of the Statement of Net Cost is in compliance with OMB
Bulletin 01-09, *Form and Content of Agency Financial Statements.*
Specifically, responsibility segments were aligned with the major goals
of the Department of Education's *Strategic Plan* *2002--2007*, as
required by the Government Performance and Results Act (GPRA).

Reporting groups were aligned with the following Strategic Goals:

-   Enhance the quality and access to postsecondary and adult education,

-   Create a culture of achievement,

-   Improve student achievement,

-   Develop safe schools and strong character, and

-   Transform education into an evidence-based field.

The importance of special education was highlighted by maintaining a
separate responsibility segment on the Statement of Net Cost.

Program A on the Statement of Net Cost relates directly to Strategic
Goal 5: Enhance the quality of and access to postsecondary and adult
education. It combines the reporting groups of Federal Student Aid, the
Office of Vocational and Adult Education, and the Office of
Postsecondary Education. Program B relates directly to Strategic Goals
1, 2, and 3: Create a culture of achievement, Improve student
achievement, and Develop safe schools and strong character. Program B
combines the Office of Elementary and Secondary Education, the Office of
English Language Acquisition and the Office of Safe and Drug-free
Schools. Program C relates to Strategic Goal 4: Transform education into
an evidenced-based field, and includes the Institute of Education
Sciences and Office of Innovation and Improvement. Finally, Program D
relates to "special education and program execution" and includes the
Office of Special Education and Rehabilitative Services.

#  {#section-9 .04-PAR-Subhead}

# Note 18. Contingencies  {#note-18.-contingencies .04-PAR-Subhead}

# Guaranty Agencies {#guaranty-agencies .04-PAR-Subhead}

The Department can assist Guaranty Agencies experiencing financial
difficulties by advancing funds or by other means. No provision has been
made in the principal statements for potential liabilities related to
financial difficulties of Guaranty Agencies because the likelihood of
such occurrences is uncertain and cannot be estimated with sufficient
reliability.

## Perkins Loans Reserve Funds

The Perkins Loan Program is a campus-based program providing financial
assistance to eligible postsecondary school students. In FY 2004, the
Department provided funding of 84.8 percent of the capital used to make
loans to eligible students through participating schools at five percent
interest. The school provided the remaining 15.2 percent of program
funding. For the latest academic year ended June 30, 2004, approximately
750,420 loans were made, totaling \$1.6 billion at 1,700 institutions,
averaging \$2,161 per loan. The Department's share of the Perkins Loan
Program was approximately \$6.5 billion as of June 30, 2004.

In FY 2003, the Department provided funding of 85.2 percent of the
capital used to make loans to eligible students through participating
schools at five percent interest. The school provided the remaining 14.8
percent of program funding. For the academic year ended June 30, 2003,
approximately 763,890 loans were made, totaling \$1.5 billion at 1,742
institutions, averaging \$1,919 per loan. The Department's share of the
Perkins Loan Program was approximately \$6.5 billion as of June 30,
2003.

Perkins Loan borrowers who meet statutory eligibility
requirements---such as service as a teacher in low-income areas, as a
Peace Corps or VISTA volunteer, in the military or in law enforcement,
nursing, or family services---may receive partial loan forgiveness for
each year of qualifying service. In these circumstances a contingency is
deemed to exist. The Department may be required to compensate Perkins
Loan institutions for the cost of the partial loan forgiveness.

# Litigation and Other Claims {#litigation-and-other-claims .04-PAR-Subhead}

The Department is involved in various lawsuits incidental to its
operations. Judgments resulting from litigation against the Department
are paid by the Department of Justice. In the opinion of management, the
ultimate resolution of pending litigation will not have a material
effect on the Department's financial statements.

# Other Matters {#other-matters .04-PAR-Subhead}

Some portion of the current year financial assistance expenses (grants)
may include funded recipient expenditures that were 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 statements.