FINANCIAL SECTION
30 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

MESSAGE FROM THE CHIEF FINANCIAL OFFICER

I

am pleased to present the Department of Education’s 

FY 2017 Agency Financial Report (AFR), which 

is intended to provide useful, easy to understand 

and accessible financial and performance information 

to our government and public stakeholders for 

consideration and evaluation of the Department’s major 

accomplishments, performance, costs, risks, and the value 

we provide to the taxpayer.

Investment in human capital through educational 

attainment is a crucial element of a strong national 

economic and global security strategy. A well-educated 

citizenry enjoys numerous benefits, including greater job 

security, higher wages, and improved health. U.S. colleges 

and universities represent critical centers for research 

and innovation and a well-educated citizenry is better 

prepared to help solve the nation’s most pressing domestic 

and international problems. While states have the greatest 

role to play in achieving and sustaining the provision of 

an excellent and equitably accessible education system for 

American students, the Department supports students by 

working with parents, students, educational institutions, 

school districts and states to foster educational excellence 

and ensure equal access to it in support of the country’s 

global competitiveness.

As a critical mission support organization, the Office 

of the Chief Financial Officer (OCFO) has primary 

responsibility for maintaining financial integrity over 

the federal resources entrusted to the Department and 

for preparing the AFR, such that our stakeholders are 

empowered with reliable information about our financial 

stewardship and achievements relative to the costs of 

executing our mission. With approximately $1.3 trillion 

in total assets, comprised primarily of credit program 

receivables that were funded by $1.2 trillion in Treasury 

borrowings and considering the approximate $340.0 

billion gross outlays made during FY 2017 to support 

education programs from preschool through postdoctoral 

research, effective internal controls over the Department’s 

business processes and financial activities are essential 

to responsibly delivering our mission outcomes and the 

Department’s strategic goals and objectives.
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION 31

MESSAGE FROM THE CHIEF FINANCIAL OFFICER | FINANCIAL SECTION

On behalf of the Department of Education, I am proud 

to present our 16th consecutive unmodified or “clean” 

opinion of our financial statements. Our clean opinion, 

along with no material weaknesses, represents the 

dedicated efforts of an exemplary team of business and 

financial management professionals, whose commitment 

to promoting financial integrity and applying effective 

controls ensures high quality, accurate, and reliable 

information for all of our customers. Their work also 

earned the Department its 13th award of the prestigious 

Certificate of Excellence in Accountability Reporting 

by the Association of Government Accountants with 

additional special recognition for Best-in-Class presentation 

of the Management’s Discussion and Analysis section of 

the AFR. This year, the Department accomplished several 

key improvements in our management and stewardship of 

taxpayer funding, including:

 Improved disclosures about the composition of our 

loan portfolio, costs, and associated credit risks.

 Development of the Continuous Controls Monitoring 

System, a robust automated capability to demonstrate 

integrity over Department payments.

 The initiation of a major upgrade to our core financial 

system to modernize its technical infrastructure and 

reduce potential cyber security risks.

 The implementation of a number of reform 

initiatives intended to help maximize employee and 

organizational efficiency.

As we continue to implement initiatives to improve 

OCFO operations, we are also firmly committed to 

supporting the Administration’s focus on reforming 

the federal government by achieving more effective, 

efficient, and accountable financial management 

operations in the Department of Education. Planned 

and ongoing actions include:

 Delivering improved financial management and 

analysis services with reduced staff through increased 

staff performance, more streamlined business 

processes, and better use of technology.

 Obtaining and analyzing data of sufficient quality 

to improve the timeliness and accuracy of financial 

reporting and to reduce improper payment and 

fraud risks, including progression towards proactive, 

preventative control through advanced data analytics. 

 Integrating enterprise risk management concepts into 

our internal control framework and developing a 

more risk aware culture in OCFO.

 Developing innovative tools and practices to expand 

support to mission offices’ effective fiscal monitoring 

of grants concurrent with the realization of staff 

reductions across the Department.

These actions will increase our effectiveness in service 

delivery and enable us to make more efficient and 

effective use of the taxpayer resources entrusted to us. 

We continuously strive to improve the quality and 

usefulness of the information provided in the AFR and 

encourage feedback or suggestions to be sent to us at 

AFRComments@ed.gov.

Tim Soltis

Delegated the Duties of Chief Financial Officer

November 13, 2017
32 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

ABOUT THE FINANCIAL SECTION

I

n FY 2017, the Department prepared its financial 

statements as a critical aspect of ensuring accountability 

and stewardship for the public resources entrusted to 

it. Preparation of these statements is an important part of 

the Department’s financial management goal of providing 

accurate and reliable information for decision making.

The Consolidated Balance Sheet summarizes the assets, 

liabilities, and net position by major category as of the 

reporting date. Intragovernmental assets and liabilities 

resulting from transactions between federal agencies 

are presented separately from assets and liabilities from 

transactions with the public.

The Consolidated Statement of Net Cost shows, by 

strategic goal, the net cost of operations for the reporting 

period. Net cost of operations consists of full program 

costs incurred by the Department less exchange revenues 

earned by those programs.

The Consolidated Statement of Changes in Net 

Position presents the Department’s beginning and 

ending net position by two components—Cumulative 

Results of Operations and Unexpended Appropriations. 

It summarizes the change in net position by major 

transaction category. The ending balances of both 

components of the net position are also reported on the 

Consolidated Balance Sheet.

The Combined Statement of Budgetary Resources

presents the budgetary resources available to the 

Department, the status of these resources, and the outlays 

of budgetary resources.

The Notes to the Financial Statements provide 

information to explain the basis of the accounting and 

presentation used to prepare the statements and to 

explain specific items in the statements. They also provide 

information to support how particular accounts have 

been valued and computed. A list of each of the notes is 

presented below.

The Combining Statement of Budgetary Resources as 

Required Supplementary Information presents budgetary 

resources by major program.

The Required Supplementary Stewardship 

Information provides disclosure of investments in 

human capital and the related program outcomes 

resulting from stewardship expense outlays.

NOTES TO THE FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

Note 2. Non-Entity Assets

Note 3. Fund Balance with Treasury

Note 4. Other Assets

Note 5. Credit Programs for Higher Education: 

Credit Program Receivables, Net and 

Liabilities for Loan Guarantees

Note 6. Liabilities Not Covered by 

Budgetary Resources

Note 7. Debt

Note 8. Subsidy Due to Treasury General Fund

Note 9. Other Liabilities

Note 10. Gross Cost and Exchange Revenue by Program 

Note 11. Credit Program Interest Expense and Revenues

Note 12. Statement of Budgetary Resources

Note 13. Reconciliation of Net Cost of Operations 

to Budget 

Note 14. Commitments and Contingencies
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

ABOUT THE FINANCIAL SECTION | FINANCIAL SECTION

33

REQUIRED SUPPLEMENTARY INFORMATION

This section contains the Combining Statement 

of Budgetary Resources for the Years Ended 

September 30, 2017, and September 30, 2016.

REQUIRED SUPPLEMENTARY 

STEWARDSHIP INFORMATION

Stewardship Expenses summarize spending and 

stakeholder relationships with state and local educational 

agencies. Stewardship resources are substantial investments 

by the federal government for the long-term benefit of the 

nation. Since costs of stewardship resources are treated as 

expenses in the financial statements in the year the costs 

are incurred, they are reported as Required Supplementary 

Stewardship Information to highlight the benefit nature of 

the costs and to demonstrate accountability.

Supplementing state and local government funding, the 

Department utilizes its annual appropriations and outlay 

authority to foster human capital improvements across the 

nation by supporting programs along the entire spectrum 

of “cradle to career” education. Increased employability 

makes Americans more competitive in the global labor 

market, yielding lower unemployment, higher economic 

well-being, and greater security for the nation.

REPORT OF THE INDEPENDENT AUDITORS

The results of the audit of the Department’s financial 

statements for FY 2017 and FY 2016 to comply with 

the Chief Financial Officers Act of 1990, as amended, 

are presented to be read in conjunction with the 

Financial Section in its entirety. The Department’s 

Office of Inspector General (OIG) contracted with 

the independent certified public accounting firm of 

CliftonLarsonAllen LLP to audit the financial statements 

of the Department as of September 30, 2017 and 2016, 

and for the years then ended.
34 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | FINANCIAL STATEMENTS

United States Department of Education 

Consolidated Balance Sheet 

As of September 30, 2017 and 2016 

(Dollars in Millions)

FY 2017 FY 2016

ASSETS

Intragovernmental:

Fund Balance with Treasury (Note 3) $ 110,174 $ 96,763

Other Intragovernmental Assets (Note 4) 65 102

Total Intragovernmental 110,239 96,865

Public:

Credit Program Receivables, Net (Note 5)

Direct Loan Program 1,041,554 958,881

FFEL Program 102,410 114,870

Other Credit Programs for Higher Education 2,755 2,828

Other Assets (Note 4) 2,285 1,363

Total Public 1,149,004 1,077,942

Total Assets (Note 2) $ 1,259,243 $ 1,174,807

LIABILITIES

Intragovernmental:

Debt (Note 7)

Direct Loan Program $ 1,061,559 $ 994,285

FFEL Program 116,290 131,347

Other Credit Programs for Higher Education 2,222 2,191

Subsidy Due to Treasury General Fund (Note 8) 7,013 2,642

Other Intragovernmental Liabilities (Note 9) 2,633 1,822

Total Intragovernmental 1,189,717 1,132,287

Public:

Other Liabilities (Note 9) 12,366 9,683

Total Liabilities (Note 6) $ 1,202,083 $ 1,141,970

Commitments and Contingencies (Note 14)

NET POSITION

Unexpended Appropriations $ 62,399 $ 61,052

Cumulative Results of Operations (5,239) (28,215)

Total Net Position $ 57,160 $ 32,837

Total Liabilities and Net Position $ 1,259,243 $ 1,174,807

The accompanying notes are an integral part of these statements.
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL STATEMENTS | FINANCIAL SECTION

35

United States Department of Education 

Consolidated Statement of Net Cost 

For the Years Ended September 30, 2017 and 2016

(Dollars in Millions)

FY 2017 FY 2016

PROGRAM COSTS

Increase College Access, Quality, and Completion

Gross Costs $ 78,289 $ 97,314

Earned Revenue (35,887) (34,316)

Net Program Costs $ 42,402 $ 62,998

Improve Preparation for College and Career from Birth 

Through 12th Grade, Especially for Children with High Needs

Gross Costs $ 22,577 $ 22,363

Earned Revenue (10) (16)

Net Program Costs $ 22,567 $ 22,347

Ensure Effective Educational Opportunities for All Students

Gross Costs $ 17,258 $ 16,925

Earned Revenue (11) (11)

Net Program Costs $ 17,247 $ 16,914

Enhance the Education System’s Ability to Continuously Improve

Gross Costs $ 2,122 $ 2,121

Earned Revenue (59) (58)

Net Program Costs $ 2,063 $ 2,063

Total Program Cost $ 120,246 $ 138,723

Total Program Revenue $ (35,967) $ (34,401)

Net Cost of Operations (Notes 10 & 13) $ 84,279 $ 104,322

The accompanying notes are an integral part of these statements.
36 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | FINANCIAL STATEMENTS

United States Department of Education 

Consolidated Statement of Changes in Net Position 

For the Years Ended September 30, 2017 and 2016

(Dollars in Millions)

FY 2017 FY 2016

 Cumulative 

Results of 

Operations 

 Unexpended 

Appropriations 

 Cumulative 

Results of 

Operations 

 Unexpended 

Appropriations 

Beginning Balances $ (28,215) $ 61,052 $ (7,937) $ 62,740

Budgetary Financing Sources

Appropriations Received $ - $ 135,945 $ - $ 88,210

Appropriations Transferred In/Out - 1 - -

Other Adjustments (Rescissions, etc.) - (1,910) - (821)

Appropriations Used 132,689 (132,689) 89,077 (89,077)

Nonexchange Revenue - - 9 -

Donations and Forfeitures of Cash and Cash Equivalents - - 1 -

Other Financing Sources

Imputed Financing from Costs Absorbed by Others 27 - 81 -

Negative Subsidy Transfers, Downward Subsidy

Re-estimates, and Other (25,461) - (5,124) -

Total Financing Sources $ 107,255 $ 1,347 $ 84,044 $ (1,688)

NET COST OF OPERATIONS $ (84,279) $ - $ (104,322) $ -

NET CHANGE $ 22,976 $ 1,347 $ (20,278) (1,688)

NET POSITION $ (5,239) $ 62,399 $ (28,215) $ 61,052

The accompanying notes are an integral part of these statements.
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL STATEMENTS | FINANCIAL SECTION

37

The accompanying notes are an integral part of these statements.

United States Department of Education 

Combined Statement of Budgetary Resources 

For the Years Ended September 30, 2017 and 2016

(Dollars in Millions)

FY 2017 FY 2016

Budgetary 

 Non-Budgetary 

Credit Reform 

Financing Accounts 

Budgetary 

 Non-Budgetary 

Credit Reform 

Financing Accounts 

BUDGETARY RESOURCES

Unobligated Balance, Brought Forward, October 1 $ 12,392 $ 15,479 $ 14,774 $ 14,437

Recoveries of Prior Year Unpaid Obligations 4,781 13,356 746 21,047

Other Changes in Unobligated Balance (+ or -) (456) (18,277) (772) (24,695)

Unobligated Balance from Prior Year Budget Authority, Net $ 16,717 $ 10,558 $ 14,748 $ 10,789

Appropriations (Discretionary and Mandatory) 134,388 - 87,924 24

Borrowing Authority (Discretionary and Mandatory) (Note 12) - 166,601 - 167,400

Spending Authority from Offsetting Collections (Discretionary and Mandatory) 1,096 69,169 522 53,608

Total Budgetary Resources $ 152,201 $ 246,328 $ 103,194 $ 231,821

STATUS OF BUDGETARY RESOURCES

New Obligations Incurred and Upward Adjustments (Total) (Note 12) $ 139,923 $ 223,115 $ 90,802 $ 216,342

Unobligated Balance, End of Year:

Apportioned, Unexpired Accounts 9,012 - 10,280 -

Unapportioned, Unexpired Accounts 2,100 23,213 1,212 15,479

Unexpired Unobligated Balance, End of year $ 11,112 $ 23,213 $ 11,492 $ 15,479

Expired Unobligated Balance, End of Year 1,166 - 900 -

Unobligated Balance, End of Year (Total) $ 12,278 $ 23,213 $ 12,392 $ 15,479

Total Status of Budgetary Resources $ 152,201 $ 246,328 $ 103,194 $ 231,821

CHANGE IN OBLIGATED BALANCE

Unpaid Obligations

Unpaid Obligations, Brought Forward, October 1 $ 54,249 $ 76,624 $ 52,645 $ 78,116

New Obligations Incurred and Upward Adjustments 139,923 223,115 90,802 216,342

Outlays (Gross) (-) (132,553) (207,402) (88,452) (196,787)

Recoveries of Prior Year Unpaid Obligations (-) (4,781) (13,356) (746) (21,047)

Unpaid Obligations, End of Year $ 56,838 $ 78,981 $ 54,249 $ 76,624

Uncollected Payments

Uncollected Payments, Federal Sources, Brought Forward, October 1 (-) $ (2) $ (4) $ (3) $ (26)

Change in Uncollected Payments, Federal Sources (+ or -) - (588) 1 22

Uncollected Payments, Federal Sources, End of Year (-) $ (2) $ (592) $ (2) $ (4)

Memorandum (Non-Add) Entries

Obligated Balance, Start of Year (+ or -) $ 54,247 $ 76,620 $ 52,642 $ 78,090

Obligated Balance, End of Year (+ or -) $ 56,836 $ 78,389 $ 54,247 $ 76,620

BUDGET AUTHORITY AND OUTLAYS, NET

Budget Authority, Gross (Discretionary and Mandatory) $ 135,484 $ 235,770 $ 88,446 $ 221,032

Actual Offsetting Collections (Discretionary and Mandatory) (-) (1,279) (166,942) (721) (114,123)

Change in Uncollected Payments from Federal Sources (Discretionary and 

Mandatory) (+ or -) - (588) 1 22

Recoveries of Prior Year Paid Obligations (Discretionary and Mandatory) (+ or -) (1) (439) (1) (516)

Budget Authority, Net (Discretionary and Mandatory) $ 134,204 $ 67,801 $ 87,725 $ 106,415

Outlays, Gross (Discretionary and Mandatory) $ 132,553 $ 207,402 $ 88,452 $ 196,787

Actual Offsetting Collections (Discretionary and Mandatory) (-) (1,279) (166,942) (721) (114,123)

Outlays, Net (Discretionary and Mandatory) 131,274 40,460 87,731 82,664

Distributed Offsetting Receipts (-) (Note 12) (19,562) - (10,766) -

Agency Outlays, Net (Discretionary and Mandatory) (Note 12) $ 111,712 $ 40,460 $ 76,965 $ 82,664
38 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

NOTES TO THE FINANCIAL STATEMENTS FOR THE 

YEARS ENDED SEPTEMBER 30, 2017 AND 2016

NOTE 1. Summary of Significant 

Accounting Policies

REPORTING ENTITY AND PROGRAMS

The U.S. Department of Education (the Department), 

a cabinet-level agency of the executive branch of the 

U.S. government, was established by Congress under the 

Department of Education Organization Act (Public Law 96-

88), which became effective on May 4, 1980. The mission 

of the Department is to promote student achievement 

and preparation for global competitiveness by fostering 

educational excellence and ensuring equal access. 

The Department is primarily responsible for 

administering federal student loan and grant programs 

and provides technical assistance to loan and grant 

recipients and other state and local partners. The largest 

portions of the Department’s financial activities relate 

to the execution of loan and grant programs which are 

discussed below.

Federal Student Loan Programs. The Department 

administers direct loan, loan guarantee, and other student 

aid programs to help students and their families finance 

the cost of postsecondary education. These include the 

William D. Ford Federal Direct Loan (Direct Loan) 

program and the Federal Family Education Loan 

(FFEL) program.

The Direct Loan program, added to the Higher Education 

Act of 1965 (HEA) in 1993 by the Student Loan Reform 

Act of 1993, authorizes the Department to make loans 

through participating schools to eligible undergraduate 

and graduate students and their parents. The Direct Loan 

program offers four types of loans: Stafford, Unsubsidized 

Stafford, PLUS, and Consolidation. Evidence of financial 

need is required for an undergraduate student to receive 

a subsidized Stafford loan. The other three loan programs 

are available to borrowers at all income levels. Loans can 

be used only to meet qualified educational expenses. 

The FFEL program, authorized by the HEA, operates 

through state and private nonprofit guaranty agencies that 

provide loan guarantees on loans made by private lenders to 

eligible students. The Student Aid and Fiscal Responsibility 

Act (SAFRA), which was included in the Health Care and 

Education Reconciliation Act of 2010 (HCERA), stated that 

no new FFEL loans would be made effective July 1, 2010. 

FFEL program receivables include defaulted FFEL loans 

and acquired FFEL loans. Acquired FFEL loans include 

interest in student loan assets acquired using temporary 

authority provided in the Ensuring Continued Access to 

Student Loans Act of 2008 (ECASLA). ECASLA gave the 

Department temporary authority to purchase FFEL loans 

and participation interests in those loans. The Department 

implemented three activities under this authority: loan 

purchase commitments; purchases of loan participation 

interests; and a put, or forward purchase commitment, 

with an Asset-Backed Commercial Paper (ABCP) Conduit. 

This authority expired after September 30, 2010; as a 

result, loan purchase commitments and purchases of 

loan participation interests concluded. However, under 

the terms of the Put Agreement with the conduit, ABCP 

Conduit activity ceased operations in January 2014.

The Department also administers loans for the Federal 

Perkins Loan program, the Historically Black Colleges 

and Universities (HBCU) Capital Financing program, 

the Health Education Assistance Loan (HEAL) program, 

and the Teacher Education Assistance for College and 

Higher Education Grant (TEACH) program, along with 

low-interest loans to institutions of higher education for 

the building and renovating of their facilities through the 

Facilities Loan programs.

Grant Programs. The Department has more than 100 

grant programs. The three largest grant programs are Title 

I of the Elementary and Secondary Education Act (ESEA), 

Federal Pell Grant (Pell Grant), and the Individuals with 

Disabilities Education Act (IDEA) grants. In addition 

to student loans and grants, the Department offers 
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

NOTES TO THE FINANCIAL STATEMENTS | FINANCIAL SECTION

39

other discretionary grants under a variety of authorizing 

legislation, awarded using a competitive process, and 

formula grants, using formulas determined by Congress 

with no application process.

PROGRAM OFFICES

The Department has three major program offices that 

administer most of its loan and grant programs: 

 Federal Student Aid (FSA) administers need-based 

financial assistance programs for students pursuing 

postsecondary education and makes available federal 

grants, direct loans, and work-study funding to 

eligible undergraduate and graduate students.

 The Office of Elementary and Secondary Education 

(OESE) assists state and local educational agencies to 

improve the achievement of preschool, elementary, 

and secondary school students, helps ensure equal 

access to services leading to such improvement—

particularly children with high needs, and provides 

financial assistance to local educational agencies whose 

local revenues are affected by federal activities.

 The Office of Special Education and Rehabilitative 

Services (OSERS) supports programs that help 

provide early intervention and special education 

services to children and youth with disabilities. 

OSERS also supports programs for the vocational 

rehabilitation of youth and adults with disabilities, 

including preemployment transition services and 

other transition services designed to assist students 

with disabilities to enter postsecondary education and 

achieve employment.

Other offices that administer programs and provide 

leadership, technical assistance, and financial support to 

state and local educational activities and institutions of 

higher education for reform, strategic investment, and 

innovation in education include: the Office of Career, 

Technical, and Adult Education (OCTAE); Office of 

Postsecondary Education (OPE); Institute of Education 

Sciences (IES); Office of English Language Acquisition 

(OELA); and Office of Innovation and Improvement 

(OII). In addition, the Office for Civil Rights (OCR) 

works to ensure equal access to education, promotes 

educational excellence throughout the nation, and 

serves student populations facing discrimination and the 

advocates and institutions promoting systemic solutions 

to civil rights issues. (See Note 10)

BASIS OF ACCOUNTING AND PRESENTATION

These financial statements have been prepared to report 

the financial position, net cost of operations, changes in 

net position, and budgetary resources of the Department, 

as required by the Chief Financial Officers Act of 1990 and 

the Government Management Reform Act of 1994. The 

financial statements were prepared from the books and 

records of the Department, in accordance with Generally 

Accepted Accounting Principles (GAAP) accepted 

in the U.S. for federal entities, issued by the Federal 

Accounting Standards Advisory Board (FASAB), and 

the Office of Management and Budget (OMB) Circular 

A-136, Financial Reporting Requirements, as revised. These 

financial statements are different from the financial reports 

prepared by the Department pursuant to OMB directives 

that are used to monitor and control the use of budgetary 

resources. FSA also issues audited stand-alone financial 

statements which are included in their annual report.

The Department’s financial statements should be read as 

a component of the U.S. government, a sovereign entity. 

One of the many implications of this is that the liabilities 

cannot be liquidated without legislation providing 

resources and legal authority to do so.

The accounting structure of federal agencies is designed 

to reflect both accrual and budgetary accounting 

transactions. Under the accrual method of accounting, 

revenues are recognized when earned and expenses are 

recognized when a liability is incurred, without regard 

to receipt or payment of cash. Budgetary accounting 

facilitates compliance with legal constraints and controls 

over the use of federal funds.

Intradepartmental transactions and balances have been 

eliminated from the consolidated financial statements. 
40 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | NOTES TO THE FINANCIAL STATEMENTS

The Department’s financial activities are interlinked and 

dependent upon the financial activities of the centralized 

management functions of the federal government. Due 

to financial regulation and management control by 

OMB and the U.S. Department of Treasury (Treasury), 

operations may not be conducted and financial positions 

may not be reported as they would if the Department 

were a separate, unrelated entity.

ACCOUNTING FOR FEDERAL 

CREDIT PROGRAMS 

The Department’s accounting for its loan and loan 

guarantee programs is based on the requirements of the 

Federal Credit Reform Act of 1990 (FCRA). The purpose 

of the FCRA is to record the lifetime subsidy cost of 

direct loans and loan guarantees, in present value terms, 

at the time the loan is disbursed (subsidy). Components 

of subsidy costs for loans and guarantees include defaults 

(net of recoveries); contractual payments to third-party 

private loan collectors who receive a set percentage of 

amounts collected; and, as an offset, origination and 

other fees collected. For direct loans, the difference 

between interest rates incurred by the Department on its 

borrowings from Treasury and interest rates charged to 

particular borrowers is also subsidized (or may provide an 

offset to subsidy if the Department’s rate is less). 

Under the FCRA, subsidy cost is estimated using the 

net present value of future cash flows to and from 

the Department. In accordance with the FCRA, 

credit programs either estimate a subsidy cost to the 

government (a “positive” subsidy), breakeven (zero 

subsidy cost), or estimate a negative subsidy cost. 

Negative subsidy occurs when the estimated cost of 

providing loans to borrowers from Treasury borrowing, 

collection costs, and loan forgiveness is less than the value 

of collections from borrowers for interest and fees, in 

present value terms.

The subsidy costs of direct loan and loan guarantee 

programs are budgeted and tracked by the fiscal year in 

which the loan award is made or the funds committed. 

Such a grouping of loans or guarantees is referred to as a 

“cohort.” A cohort is a grouping of direct loans obligated 

or loan guarantees committed by a program in the same 

year even if disbursements occur in subsequent years.

In order to account for the change in the net present 

value of the loan portfolio over time, the subsidy cost 

is “amortized” each year. Amortization accounts for the 

differences in interest rates, accruals, and cash flows 

over the life of a cohort, ensuring that cost is reflected 

in subsidy estimates and re-estimates. Amortization of 

subsidy is calculated as the difference between interest 

received from borrowers and Treasury (on uninvested 

cash) and interest paid to Treasury on borrowings. 

The FCRA establishes the use of financing, program, 

and Treasury General Fund receipt accounts for loan 

guarantees committed and direct loans obligated after 

September 30, 1991. 

 Financing accounts borrow funds from Treasury, 

make direct loan disbursements, collect fees from 

lenders and borrowers, pay claims on guaranteed 

loans, collect principal and interest from borrowers, 

earn interest from Treasury on any uninvested funds, 

and transfer excess subsidy to Treasury General Fund 

receipt accounts. Financing accounts are presented 

separately in the combined statement of budgetary 

resources (SBR) as non-budgetary credit reform 

accounts to allow for a clear distinction from all other 

budgetary accounts. This facilitates reconciliation of 

the SBR to the Budget of the United States Government 

(President’s Budget).

 Program accounts receive and obligate appropriations 

to cover the positive subsidy cost of a direct loan 

or loan guarantee when the loan is approved and 

disburses the subsidy cost to the financing account 

when the loan is issued. Program accounts also receive 

appropriations for administrative expenses.

 Treasury General Fund receipt accounts receive 

amounts paid from financing accounts when there 

are negative subsidies for new loan disbursements 

or downward re-estimates of the subsidy cost of 

existing loans.

The Department records an estimated obligation each 

year for direct loan awards to be made in a fiscal year 

based on estimates of schools’ receipt of aid applications. 

The Department advances funds to schools based on 

these estimates. Promissory notes are signed when 

schools reach individual agreements with borrowers and 

the schools subsequently report each disbursement of 

advanced funds to the Department. A new promissory 

note is usually not required for students in the second 

or later year of study. Half of all loan awards are issued 
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

NOTES TO THE FINANCIAL STATEMENTS | FINANCIAL SECTION

41

in the fourth quarter of the fiscal year. Loans awarded 

are typically disbursed in multiple installments over an 

academic period. As a result, loans may be disbursed 

over multiple fiscal years. Loan awards may not be fully 

disbursed due to students leaving or transferring to 

other schools. The Department’s obligation estimate 

may also not reflect the actual amount of awards made. 

Based on historical averages, the Department expects 

approximately 7.5 percent of the amount obligated for 

new loan awards will not be disbursed.

When a loan is placed in deferment or forbearance, loan 

repayment is temporarily suspended with the length of 

postponement different for each lender. Interest accrues 

while a loan is in deferment or forbearance. Loans are 

cancelled if a person dies, meets disability requirements, 

or through the bankruptcy courts. Loans are also 

cancelled through the Public Service Loan Forgiveness 

(PSLF) Program, which forgives the remaining balance 

on a Direct Loan after 120 qualifying monthly payments 

are made. These payments must be made under a 

qualifying repayment plan while working full-time for a 

qualifying employer. In addition, the Department offers 

the Pay As You Earn (PAYE) program. This student loan 

repayment program is designed to help borrowers who 

struggle to make their normal student loan payments. 

The plan allows payments to be limited to 10 percent of 

discretionary income if qualifications are met. Under the 

PAYE program, if all requirements are met, forgiveness of 

the remaining balance of a student loan is possible after 

20 years of consistent payments.

BUDGETARY RESOURCES

Budgetary resources are amounts available to enter into 

new obligations and to liquidate them. The Department’s 

budgetary resources include unobligated balances of 

resources from prior years; recoveries of prior-year 

unpaid obligations; and new resources, which include 

appropriations, authority to borrow from Treasury, and 

spending authority from collections.

Borrowing authority is an indefinite budgetary 

resource authorized under the FCRA. This resource, 

when realized, finances the unsubsidized portion of 

the Direct Loan, FFEL, and other loan programs. In 

addition, borrowing authority is requested to cover 

the cost of the initial loan disbursement as well as any 

related negative subsidy to be transferred to Treasury 

General Fund receipt accounts. Treasury prescribes 

the terms and conditions of borrowing authority and 

lends to the financing account amounts as appropriate. 

Amounts borrowed, but not yet disbursed, are included 

in uninvested funds and earn interest. Treasury uses 

the same weighted average interest rates for both the 

interest charged on borrowed funds and the interest 

earned on uninvested funds. Treasury sets a different 

fixed interest rate to be used for each loan cohort once 

the loans are substantially disbursed. The Department 

may carry forward borrowing authority to future fiscal 

years provided that cohorts are disbursing loans. All 

borrowings from Treasury are effective on October 1st of 

the current fiscal year, regardless of when the Department 

borrowed the funds, except for amounts borrowed to 

make annual interest payments.

Authority to borrow from Treasury provides most of 

the funding for disbursements made under the Direct 

Loan, FFEL, and other loan programs. Subsidy and 

administrative costs of the programs are funded by 

appropriations. Borrowings are repaid using collections 

from borrowers, fees, and interest on uninvested funds.

Unobligated balances represent the cumulative amount 

of budgetary resources that are not obligated and 

that remain available for obligation under law, unless 

otherwise restricted. Resources expiring at the end of 

the fiscal year remain available for five years, but only 

for upward adjustments of prior year obligations, after 

which they are cancelled and may not be used. Resources 

that have not expired at year-end are available for new 

obligations, as well as upward adjustments of prioryear obligations. Funds are appropriated on an annual, 

multiyear, or no-year basis. Appropriated funds shall 

expire on the last day of availability and are no longer 

available for new obligations. Amounts in expired funds 

are unavailable for new obligations, but may be used to 

adjust previously established obligations.

Permanent Indefinite Budget Authority. The Direct 

Loan, FFEL, and other loan programs have permanent 

indefinite budget authority through legislation to fund 

subsequent increases to the estimated future costs of 

the loan programs. Parts B and D of the HEA pertain 

to the existence, purpose, and availability of permanent 

indefinite budget authority for these programs.

Reauthorization of Legislation. Funds for most 

Department programs are authorized, by statute, to be 

appropriated for a specified number of years, with an 
42 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | NOTES TO THE FINANCIAL STATEMENTS

automatic one-year extension available under Section 422 

of the General Education Provisions Act. Congress may 

continue to appropriate funds after the expiration of the 

statutory authorization period, effectively reauthorizing 

the program through the appropriations process. The 

current Budget of the United States Government presumes 

all programs continue in accordance with congressional 

budgeting rules. (See Note 12)

USE OF ESTIMATES

Department management is required to make certain 

estimates while preparing consolidated financial 

statements in conformity with GAAP. These estimates 

are reflected in the assets, liabilities, net cost, and net 

position of the financial statements and may differ from 

actual results. The Department’s estimates are based on 

management’s best knowledge of current events, historical 

experiences, and other assumptions that are believed 

to be reasonable under the circumstances. Significant 

estimates reported on the financial statements include: 

allocation of Department administrative overhead costs; 

allowance for subsidy for direct, defaulted guaranteed, 

and acquired loans; the liability for loan guarantees; the 

amount payable or receivable from annual credit program 

re-estimates and modifications of subsidy cost; and grant 

liability and advance accruals. (See Notes 4, 5, 9, and 10)

ENTITY AND NON-ENTITY ASSETS

Assets are classified as either entity or non-entity assets. 

Entity assets are those that the Department has authority 

to use for its operations. Non-entity assets are those 

held by the Department but not available for use in its 

operations. Non-entity assets are offset by liabilities to 

third parties and have no impact on net position. The 

Department combines its entity and non-entity assets on 

the balance sheet and discloses its non-entity assets in the 

notes. (See Note 2)

FUND BALANCE WITH TREASURY

Fund Balance with Treasury includes four types of funds 

in the Department’s accounts with Treasury available to 

pay current liabilities and finance authorized purchases, 

as well as funds restricted until future appropriations are 

received: (1) general funds, which consist of expenditure 

accounts used to record financial transactions funded by 

congressional appropriations (which include amounts 

appropriated to fund subsidy and administrative costs of 

loan programs); (2) revolving funds, which manage the 

activity of self-funding programs whether through fees, 

sales, or other income (which include financing accounts 

for loan programs); (3) special funds, which collect funds 

from sources that are authorized by law for a specific 

purpose—these receipts are available for expenditure 

for special programs; and (4) other funds include trust 

funds, deposit funds, agency receipt funds, and clearing 

accounts. Treasury processes cash receipts and cash 

disbursements for the Department. The Department’s 

records are reconciled with Treasury’s. (See Note 3)

ACCOUNTS RECEIVABLE

Accounts receivable are amounts due to the Department 

from the public and other federal agencies. Receivables 

from the public result from overpayments to recipients 

of grants and other financial assistance programs, as well 

as disputed costs resulting from audits of educational 

assistance programs. Amounts due from federal agencies 

result from reimbursable agreements entered into by 

the Department with other agencies to provide various 

goods and services. Accounts receivable are reduced to 

net realizable value by an allowance for uncollectible 

amounts. The estimate of an allowance for loss on 

uncollectible accounts is based on the Department’s 

experience in the collection of receivables and an analysis 

of the outstanding balances. (See Note 4)

GUARANTY AGENCIES’ FEDERAL FUNDS

Guaranty Agencies’ Federal Funds are primarily 

comprised of the federal government’s interest in the 

program assets held by state and nonprofit FFEL program 

guaranty agencies. Section 422A of the HEA required 

FFEL guaranty agencies to establish federal student loan 

reserve funds (federal funds). Federal funds include initial 

federal start-up funds, receipts of federal reinsurance 

payments, insurance premiums, guaranty agency share 

of collections on defaulted loans, investment income, 

administrative cost allowances, and other assets.

The balance in the Federal Fund represents consolidated 

reserve balances of the 26 guaranty agencies based 

on the Guaranty Agency financial reports that each 

agency submits annually to the Department. Although 

the Department and the guaranty agencies operate on 

different fiscal years, all guaranty agencies are subject to an 

annual audit based on form of organization. A year-end 

valuation adjustment is made to adjust the Department’s 

balances in order to comply with federal accounting 

principles and disclose funds held outside of Treasury.
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

NOTES TO THE FINANCIAL STATEMENTS | FINANCIAL SECTION

43

Guaranty Agencies’ Federal Funds are classified as 

non-entity assets with the public and are offset by a 

corresponding liability due to Treasury. The federal funds 

are held by the guaranty agencies but can only be used 

for certain specific purposes listed in the Department’s 

regulations. The federal funds are the property of the 

U.S. and are reflected in the Budget of the United States 

Government. Payments made to the Department from 

guaranty agencies’ federal funds through a statutory recall 

or agency closures represent capital transfers and are 

credited to the Department’s Fund Balance with Treasury 

account. (See Notes 2, 4, and 9)

CREDIT PROGRAM RECEIVABLES, NET AND 

LIABILITIES FOR LOAN GUARANTEES 

The financial statements reflect the Department’s estimate 

of the long-term subsidy cost of direct and guaranteed 

loans in accordance with the FCRA. Loans and interest 

receivable are valued at their gross amounts less an 

allowance for the present value of amounts not expected 

to be recovered and thus having to be subsidized—called 

an “allowance for subsidy.” The difference between the 

gross amount and the allowance for subsidy is the present 

value of the cash flows to, and from, the Department that 

are expected from receivables over their projected lives. 

Similarly, liabilities for loan guarantees are valued at the 

present value of the cash outflows from the Department 

less the present value of related inflows. The estimated 

present value of net long-term cash outflows of the 

Department for subsidized costs is net of recoveries, 

interest supplements, and offsetting fees.

The liability for loan guarantees presents the net present 

value of all future cash flows from currently insured FFEL 

loans, including claim payments, interest assistance, 

allowance payments, and recoveries from assigned loans. 

Guaranteed loans that default are initially turned over to 

guaranty agencies for collection. Defaulted FFEL loans are 

accounted for as assets and reported at their net present 

value, similar to direct loans, although they are legally 

not direct student loans. Credit program receivables, net 

includes defaulted FFEL loans owned by the Department 

and held by the Department or guaranty agencies. In 

most cases, after approximately four years, defaulted 

guaranteed loans not in repayment are turned over by the 

guaranty agencies to the Department for collection.

FFEL program receivables include purchased loans and 

other interests acquired under an expired program. The 

cash flows related to these receivables include collections 

on purchased loans and other activities, including transfers 

of re-estimated subsidy. The cash flows of these authorities 

also include inflows and outflows associated with the 

underlying or purchased loans and other related activities, 

including any positive or negative subsidy transfers. 

Capitalization of interest occurs as a result of various 

initiatives such as loan consolidations. As a result, 

interest receivable is reduced and loan principal is 

increased. (See Note 5)

PROPERTY AND EQUIPMENT, NET AND LEASES

The Department has very limited acquisition costs 

associated with buildings, furniture, and equipment as 

all Department and contractor staff are housed in leased 

buildings. The Department does not own real property 

for the use of its staff. The Department leases office 

space from the General Services Administration (GSA). 

The lease contracts with GSA for privately and publicly 

owned buildings are operating leases.

The Department also leases information technology and 

telecommunications equipment, as part of a contractorowned, contractor-operated services contract. Lease 

payments associated with this equipment have been 

determined to be operating leases and, as such, are 

expensed as incurred. The noncancellable lease term 

is one year, with the Department holding the right to 

extend the lease term by exercising additional one-year 

options. (See Notes 4 and 14)

LIABILITIES

Liabilities represent actual and estimated amounts to 

be paid as a result of transactions or events that have 

already occurred. However, no liabilities can be paid by 

the Department without budget authority. Liabilities 

for which an appropriation has not been enacted are 

classified as liabilities not covered by budgetary resources, 

and there is no certainty that an appropriation will 

be enacted. The government, acting in its sovereign 

capacity, can abrogate liabilities that arise from activities 

other than contracts. FFEL program and Direct Loan 

program liabilities are entitlements covered by permanent 

indefinite budget authority. (See Note 6)
44 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | NOTES TO THE FINANCIAL STATEMENTS

ACCOUNTS PAYABLE

Accounts payable include amounts owed by the 

Department for goods and services received from other 

entities, as well as payments not yet processed. Accounts 

payable to the public primarily consists of in-process 

grant and loan disbursements, including an accrued 

liability for schools that have disbursed loans prior to 

requesting funds. (See Note 9)

DEBT 

The Department borrows from Treasury to provide 

funding for the Direct Loan, FFEL, and other credit 

programs for higher education. The liability to Treasury 

from borrowings represents unpaid principal at yearend. The Department repays the principal based on 

available fund balances. Interest rates are based on the 

corresponding rate for 10-year Treasury securities and are 

set for those borrowings supporting each cohort of loans 

once the loans for that cohort are substantially disbursed. 

Interest is paid to Treasury on September 30th. In 

addition, the Federal Financing Bank (FFB) holds bonds 

issued by a designated bonding authority, on behalf of the 

Department, for the HBCU Capital Financing program. 

The debt for other credit programs for higher education 

includes the liability for full payment of principal and 

accrued interest for the FFB-financed HBCU Capital 

Financing program. (See Note 7)

NET COST

Net cost consists of gross costs and earned revenue. 

Gross costs and earned revenue are classified as 

intragovernmental (exchange transactions between 

the Department and other entities within the federal 

government) or with the public (exchange transactions 

between the Department and nonfederal entities).

Net program costs are gross costs less revenue earned 

from activities. The Department determines gross cost 

and earned revenue by tracing amounts back to the 

specific program office. Administrative overhead costs 

of funds unassigned are allocated based on full-time 

employee equivalents of each program. (See Note 10)

CREDIT PROGRAM INTEREST 

REVENUE AND EXPENSE

The Department recognizes interest revenue from the 

public when interest is accrued on Direct Loan program 

loans, defaulted and acquired FFEL loans, and outstanding 

principal for other loan programs. Interest due from 

borrowers is accrued at least monthly and is satisfied upon 

collection or capitalization into the loan principal. Federal 

interest revenue is recognized on the unused fund balances 

with Treasury in the financing accounts.

Federal interest expense is recognized monthly on the 

outstanding borrowing from Treasury (debt) used to 

finance direct loan and loan guarantee programs. Accrued 

interest to Treasury is paid on September 30th. The 

interest rate for federal interest expense is the same as the 

rate used for federal interest revenue.

Interest expense equals interest revenue plus 

administrative fees accrued for all credit programs due to 

subsidy amortization. Subsidy amortization is required 

by the FCRA and accounts for the difference between 

interest expense and revenue cash flows. For direct loans, 

the allowance for subsidy is adjusted with the offset to 

interest revenue. For guaranteed loans, the liability for 

loan guarantees is adjusted with the offset to interest 

expense. (See Note 11)

NET POSITION

Net position consists of unexpended appropriations 

and cumulative results of operations. Unexpended 

appropriations include undelivered orders and 

unobligated balances, except for amounts in financing 

accounts, liquidating accounts, and trust funds. 

Cumulative results of operations represent the net 

difference since inception between (1) expenses and (2) 

revenues and financing sources.
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

NOTES TO THE FINANCIAL STATEMENTS | FINANCIAL SECTION

45

PERSONNEL COMPENSATION AND OTHER 

EMPLOYEE BENEFITS

Annual, Sick, and Other Leave. The liability for annual 

leave, compensatory time off, and other vested leave is 

accrued when earned and reduced when taken. Each 

year, the accrued annual leave account balance is adjusted 

to reflect current pay rates. Sick leave and other types 

of nonvested leave are expensed as taken. Annual leave 

earned but not taken, within established limits, is funded 

from future financing sources.

Retirement Plans and Other Retirement Benefits.

Employees participate in either the Civil Service 

Retirement System (CSRS), a defined benefit plan, or the 

Federal Employees Retirement System (FERS), a defined 

benefit and contribution plan. For CSRS employees, the 

Department contributes a fixed percentage of pay.

FERS consists of Social Security, a basic annuity plan, 

and the Thrift Savings Plan. The Department and the 

employee contribute to Social Security and the basic 

annuity plan at rates prescribed by law. In addition, 

the Department is required to contribute to the Thrift 

Savings Plan a minimum of 1 percent per year of the 

basic pay of employees covered by this system, match 

voluntary employee contributions up to 3 percent of the 

employee’s basic pay, and match one-half of contributions 

between 3 percent and 5 percent of the employee’s 

basic pay. For FERS employees, the Department also 

contributes the employer’s share of Medicare.

Contributions for CSRS, FERS, and other retirement 

benefits are insufficient to fund the programs fully and 

are subsidized by the Office of Personnel Management 

(OPM). The Department imputes its share of the OPM 

subsidy, using cost factors provided by OPM, and reports 

the full cost of the programs related to its employees.

Federal Employees’ Compensation Act. The Federal 

Employees’ Compensation Act (FECA) provides income 

and medical cost protection to covered federal civilian 

employees injured on the job, employees who have 

incurred work-related occupational diseases, and 

beneficiaries of employees whose deaths are attributable 

to job-related injuries or occupational diseases. The 

FECA program is administered by the U.S. Department 

of Labor (DOL), which pays valid claims and 

subsequently seeks reimbursement from the Department 

for these paid claims.

The FECA liability consists of two components. The first 

component is based on actual claims paid and recognized 

by the Department as a liability. Generally, the 

Department reimburses DOL within two to three years 

once funds are appropriated. The second component is 

the estimated liability for future benefit payments based 

on unforeseen events, such as death, disability, medical, 

and miscellaneous costs as determined by DOL annually. 

(See Notes 6 and 9)

RECLASSIFICATIONS

Certain reclassifications were made to the prior year 

notes to conform to the current year presentation. 

These changes had no effect on total assets, liabilities 

and net position, net cost of operations, or budgetary 

resources. Components of Fund Balance with Treasury 

in Note 3 were reclassified to identify the amount of 

borrowing authority not yet converted to Fund Balance 

with Treasury; the total Fund Balance with Treasury was 

unaffected. Components of gross cost and earned revenue 

in Note 10 were reclassified between intragovernmental 

and with the public to better reflect the underlying 

activities that resulted in changes in the Guaranty 

Agencies’ Federal Funds balance; the total gross cost and 

the total earned revenue were unaffected. Direct Loan 

program revenue was reclassified in Note 5 to better reflect 

administrative fee revenue; total Direct Loan program 

revenue was unaffected. Components of Distributed 

Offsetting Receipts in Note 12 were reclassified to identify 

the amount associated with HEAL program loans; total 

distributed offsetting receipts was unaffected.
46 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | NOTES TO THE FINANCIAL STATEMENTS

NOTE 2. Non-Entity Assets

As of September 30, 2017 and 2016, non-entity assets consisted of the following:

The Department’s FY 2017 assets are predominantly entity assets (99.8 percent), leaving the small portion of assets 

remaining as non-entity assets. Non-entity intragovernmental assets primarily consist of balances in deposit and clearing 

accounts. Non-entity assets with the public primarily consist of guaranty agency reserves (78.7 percent), reported as 

Guaranty Agencies’ Federal Funds, and Federal Perkins Loan program loan receivables (18.8 percent), reported as credit 

program receivables, net. Federal Perkins Loan program receivables are a non-entity asset because the assets are held by the 

Department but are not available for use by the Department. The corresponding liabilities for these non-entity assets are 

reflected in various accounts, including intragovernmental accounts payable, Guaranty Agencies’ Federal Funds Due to 

Treasury, and other liabilities. (See Note 9)

2017 2016

Intragovernmental With the Public Intragovernmental With the Public

Non-Entity Assets

Fund Balance with Treasury $ 260 $ - $ 231 $ -

Credit Program Receivables, Net - 495 - 449

Other Assets

Guaranty Agencies’ Federal Funds - 2,077 - 1,197

Accounts Receivable, Net - 68 - 69

Total Non-Entity Assets 260 2,640 231 1,715

Entity Assets 109,979 1,146,364 96,634 1,076,227

Total Assets $ 110,239 $ 1,149,004 $ 96,865 $ 1,077,942

Non-Entity Assets

(Dollars in Millions)
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

NOTES TO THE FINANCIAL STATEMENTS | FINANCIAL SECTION

47

Fund Balance with Treasury 

(Dollars in Millions)

General 

Funds

Revolving 

Funds

Special 

Funds

All Other 

Funds Total

2017

Unobligated Balance

 Available $ 9,008 $ - $ 3 $ 1 $ 9,012

Unavailable 1,174 23,218 10 - 24,402

Obligated Balance, not Disbursed 56,829 78,390 - - 135,219

Authority Temporarily Precluded from Obligation - - 1 - 1

Borrowing Authority Not Yet Converted to Fund Balance 

with Treasury - (58,701) - - (58,701)

Other - - - 241 241

Total Fund Balance with Treasury $ 67,011 $ 42,907 $ 14 $ 242 $ 110,174

2016

Unobligated Balance

 Available $ 10,280 $ - $ - $ - $ 10,280

Unavailable 902 15,480 12 - 16,394

Obligated Balance, not Disbursed 54,240 76,621 1 - 130,862

Borrowing Authority Not Yet Converted to Fund Balance with 

Treasury - (60,991) - - (60,991)

Other - - - 218 218

Total Fund Balance with Treasury $ 65,422 $ 31,110 $ 13 $ 218 $ 96,763

NOTE 3. Fund Balance with Treasury

Fund Balance with Treasury by status of funds and fund type, as of September 30, 2017 and 2016, consisted of the following:

COMPOSITION OF FUNDS

A portion of the general funds is provided in advance by multiyear appropriations for obligations anticipated during the 

current and future fiscal years. Revolving funds are derived from borrowings, as well as collections from the public and 

other federal agencies. Special funds include fees collected on delinquent or defaulted Perkins loans that have reverted back 

to the Department from the initial lenders.

STATUS OF FUNDS

Available unobligated balances represent amounts that are apportioned for obligation in the current fiscal year. Unavailable 

unobligated balances represent amounts that are not apportioned for obligation during the current fiscal year and expired 

appropriations no longer available to incur new obligations. Total unavailable unobligated balance ($24,402 million) 

differs from unapportioned and expired amounts on the SBR ($26,479 million) due to the Guaranty Agencies’ Federal 

Funds ($2,077 million).
48 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | NOTES TO THE FINANCIAL STATEMENTS

NOTE 4. Other Assets

Other assets, as of September 30, 2017 and 2016, consisted of the following:

NOTE 5. Credit Programs for Higher Education: Credit Program Receivables, Net and Liabilities 

for Loan Guarantees

Credit program receivables, as of September 30, 2017 and 2016, consisted of the following:

The federal student loan programs provide students and their families with the funds to help meet postsecondary 

education costs. Funding for these programs is provided through permanent indefinite budget authority. What follows is 

additional analysis of the activity, costs and adjustments for each of the loan programs.

William D. Ford Federal Direct Loan Program. The federal government makes loans directly to students and parents 

through participating institutions of higher education under the Direct Loan program. Direct Loans are originated and 

serviced through contracts with private vendors.

Direct Loan program loan receivables include defaulted and nondefaulted loans owned and held by the Department. Of 

the $1,058.4 billion in gross receivables, as of September 30, 2017, $70.7 billion (6.7 percent) in loan principal was in 

default and had been transferred to the Department’s defaulted loan servicer, compared to $57.3 billion (6.0 percent) as 

of September 30, 2016.

Other Assets 

(Dollars in Millions)

2017 2016

Intragovernmental With the Public Intragovernmental With the Public

Guaranty Agencies’ Federal Funds $ - $ 2,077 $ - $ 1,197 

Accounts Receivable, Net 1 172 1 137 

Advances 64 1 101 3 

Property and Equipment, Net - 33 - 24 

Other - 2 - 2 

Total Other Assets $ 65 $ 2,285 $ 102 $ 1,363 

Credit Program Receivables

(Dollars in Millions)

Principal Accrued Interest Allowance for 

Subsidy Net

2017

Direct Loan Program $ 998,825 $ 59,534 $ (16,805) $ 1,041,554 

FFEL Program 101,601 19,338 (18,529) 102,410 

Other Credit Programs for Higher Education 3,157 409 (811) 2,755 

Total Credit Receivables $ 1,103,583 $ 79,281 $ (36,145) $ 1,146,719 

2016

Direct Loan Program $ 902,754 $ 50,835 $ 5,292 $ 958,881 

FFEL Program 109,804 18,191 (13,125) 114,870 

Other Credit Programs for Higher Education 2,988 389 (549) 2,828 

Total Credit Receivables $ 1,015,546 $ 69,415 $ (8,382) $ 1,076,579 
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

NOTES TO THE FINANCIAL STATEMENTS | FINANCIAL SECTION

49

Direct Loan Program Reconciliation of Allowance for Subsidy 

(Dollars in Millions)

2017 2016

Beginning Balance, Allowance for Subsidy $ (5,292) $ (35,496)

Activity

Fee Collections 1,694 1,685 

Loan Cancellations (7,689) (5,065)

Subsidy Allowance Amortization 23,276 17,815 

Other (513) (350)

Total Activity 16,768 14,085 

Components of Subsidy Expenses for 2017 and 2016 Cohorts of Loans

Interest Rate Differential (13,045) (15,463)

Defaults, Net of Recoveries (133) (127)

Fees (1,968) (1,993)

Other 12,541 11,887 

Negative Subsidy Expenses for 2017 and 2016 Cohorts of Loans (2,605) (5,696)

Components of Subsidy Re-estimates For All Prior Year Cohorts of Loans

Interest Rate Re-estimates (5,765) (1,536)

Technical and Default Re-estimates 13,699 23,351 

Upward Subsidy Re-estimates of Prior Year Cohorts of Loans 7,934 21,815 

Ending Balance, Allowance for Subsidy $ 16,805 $ (5,292)

The following schedule provides a reconciliation between the beginning and ending balances of the allowance for subsidy 

for the Direct Loan program:

The estimation process used to determine the amount of positive or negative subsidy expense each fiscal year, and 

subsequently the cumulative taxpayer cost of the program (allowance for subsidy), is subject to various internal and 

external risk factors which often show strong interdependence with one another. These risks include uncertainty about 

changes in the general economy, changes in the legislative and regulatory environment, and changing trends in borrower 

performance with regard to contractual cash flows within the loan programs.

Due to the complexity of the Direct Loan program, there is inherent projection risk in the process used for estimating 

long-term program costs. As stated, some uncertainty stems from potential changes in student loan legislation and 

regulations because these changes may fundamentally alter the cost structure of the program. Operational and policy 

shifts, such as growing efforts to increase borrower enrollment in income-driven repayment (IDR) plans, may also affect 

program costs by causing significant changes in borrower repayment timing. Actual performance may deviate from 

estimated performance, which is not unexpected given the long-term nature of these loans (cash flows may be estimated 

up to 40 years), and the multitude of projection paths and possible outcomes. The increasing enrollment of borrowers 

in the IDR plans has made projection of borrower incomes a key input for the estimation process. This uncertainty is 

directly tied to the macroeconomic climate and is another inherent program element that displays the interrelated risks 

facing the Direct Loan program.

Loan cancellations include write-offs of loans because the borrower died, became disabled, or declared bankruptcy. The 

interest rate re-estimate reflects the cost of finalizing the Treasury borrowing rate to be used for borrowings received 

to fund the disbursed portion of the loan awards obligated. Other components of subsidy transfers consist of contract 

collection costs, program review collections, fees, loan forgiveness under Pay as You Earn (PAYE) and other accruals. 
50 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | NOTES TO THE FINANCIAL STATEMENTS

Direct Loan Program Subsidy Expense 

(Dollars in Millions)

2017 2016

Components of Subsidy Expenses for 2017 and 2016 Cohorts of Loans

Interest Rate Differential $ (13,045) $ (15,463)

Defaults, Net of Recoveries (133) (127)

Fees (1,968) (1,993)

Other 12,541 11,887

Negative Subsidy Expenses For 2017 and 2016 Cohorts of Loans (2,605) (5,696)

Upward Subsidy Re-estimates For All Prior Loan Cohorts 7,934 21,815

Direct Loan Subsidy Expense $ 5,329 $ 16,119 

The following schedule summarizes the Direct Loan program interest expense and revenues for the years ended 

September 30, 2017 and 2016:

The following schedule summarizes the Direct Loan subsidy expense for the years ended September 30, 2017 and 2016:

Direct Loan program re-estimated subsidy cost was adjusted upward by $7.9 billion in FY 2017. In addition to the major 

assumption updates described below, the re-estimate reflects several other assumption updates, including interest rates 

provided by OMB, volume, and enter repayment rates. Prepayment rates increased from the FY 2016 estimate, resulting 

in a $2.4 billion upward re-estimate. Contract collection costs were updated for new data reflecting lower overall average 

commission rates, resulting in a $5.1 billion downward re-estimate.

 IDR Model Changes. The U.S. Government Accountability Office (GAO) audit report, Federal Student Loans: 

Education Needs to Improve Its Income Driven Repayment Plan Budget Estimates, identified several areas in which the 

Department could improve its IDR cost estimates. Largely in response to this audit, as well as concerns raised in FY 

2016’s Independent Auditor’s Report, in FY 2017 the Department incorporated an adjustment for inflation into 

the Department’s IDR submodel, modified the current IDR submodel to estimate IDR subsidies by loan type, and 

implemented methods to address concerns regarding the volatility of the submodel’s income data. In addition, default; 

collection; death, disability, and bankruptcy; and prepayment rate assumptions used by the submodel were updated. 

The combined effect of these changes was a net downward re-estimate of $14.7 billion.

Direct Loan Program Interest Expense and Revenues 

(Dollars in Millions)

2017 2016

Interest Expense on Treasury Borrowing $ 31,286 $ 30,503 

Total Interest Expense $ 31,286 $ 30,503 

Interest Revenue from the Public $ 50,142 $ 44,199 

Interest Revenue on Uninvested Funds 4,258 3,943

Administrative Fees 162 176

Amortization of Subsidy (23,276) (17,815)

Total Revenues $ 31,286 $ 30,503 
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

NOTES TO THE FINANCIAL STATEMENTS | FINANCIAL SECTION

51

Direct Loan Subsidy Rates—Cohort 2017

Interest Differential Defaults Fees Other Total

Stafford 4.33% 1.46% -1.07% 7.21% 11.93%

Unsubsidized Stafford -8.33% 0.93% -1.07% 8.99% 0.52%

PLUS -18.97% 0.56% -4.30% 7.86% -14.85%

Consolidation 4.97% 1.25% 0.00% 10.89% 17.11%

Weighted Average Total -6.84% 1.06% -1.21% 9.15% 2.16%

 Repayment Plan Selection. The GAO audit report cited above also recommended the Department help ensure 

that subsidy estimates reasonably reflect trends in IDR plan participation. In response, the Department updated its 

methodology for repayment plan selection, taking into account the timing of repayment plan selection as well as recent 

growth trends in the selection of income-driven repayment plans. The combined effect of these changes was a net 

upward re-estimate of $18.4 billion.

 Death, Disability, and Bankruptcy. The Department made major updates to the death, disability, and bankruptcy 

assumption in FY 2017. These updates included a revised accounting for the effect of a matching agreement with 

Social Security Administration, updates to closed school regulations, and revised borrower defense regulations. Updates 

to the data used to calculate discharges were also incorporated. The combined effect of these changes were a net upward 

re-estimate of $9.2 billion.

Subsidy rates are sensitive to the difference between the borrowers’ rates and the rate the Department is charged by 

Treasury on the debt to fund the loans; for example, a 1 percent increase in projected borrower interest rates would reduce 

projected direct loan subsidy cost by $5.2 billion. Re-estimated costs only include cohorts that are 90 percent disbursed; 

cohort years 1994–2016. With the increase in IDR participation, the Department also conducted sensitivities on incomes 

for students in IDR and Public Service Loan Forgiveness (PSLF) plans. For example, a 10 percent upward increase in 

borrower incomes decreases costs almost $2.3 billion for cohort 2016. A 10 percent increase in PSLF plan participation 

would increase costs by $.6 billion for cohort 2016. 

Direct Loan program re-estimated subsidy cost was adjusted upward by $21.8 billion in FY 2016. The re-estimates reflect 

several updated assumptions: however, in this case, the size of the net upward re-estimate was due largely to collection 

rates on defaulted loans and repayment plan selection. Actual collections on defaults since FY 2011 were lower than 

anticipated, which reduced estimated lifetime rates and increased the cost to the Department by $10.1 billion. For 

repayment plan selection, a greater percentage of borrowers chose costlier plans than had been estimated and increased the 

cost to the Department by $8.1 billion. The percentage of borrowers choosing an IDR plan was the primary cost driver 

for that assumption.

The subsidy rates applicable to the 2017 loan cohort year follow:

The subsidy rate represents the subsidy expense of the program in relation to the obligations or commitments made 

during the fiscal year and are weighted on gross volume. The subsidy rates shown above, which reflect aggregate positive 

subsidy in the FY 2017 cohort, cannot be applied to direct loans disbursed during the current reporting year to yield the 

subsidy expense, nor are these rates applicable to the portfolio as a whole. The Department does not re-estimate student 

loan cohorts until they are at least 90 percent disbursed. As a result, the financial statement re-estimate does not include 

a re-estimate of the current year cohort. The first re-estimate of this cohort will take place upon execution of the FY 2019 

President’s Budget.
52 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | NOTES TO THE FINANCIAL STATEMENTS

The subsidy costs of the Department’s student loan programs, especially the Direct Loan program, are highly sensitive 

to changes in actual and forecasted interest rates. The formulas for determining program interest rates are established by 

statute; the existing loan portfolio has a mixture of borrower and lender rate formulas. Interest rate projections are based 

on probabilistic interest rate scenario inputs developed and provided by OMB.

The following schedule summarizes the Direct Loan program loan disbursements by loan type for the years ended 

September 30, 2017 and 2016:

Direct Loan Program Loan Disbursements by Loan Type

(Dollars in Millions)

2017 2016

Stafford $ 23,368 $ 23,752 

Unsubsidized Stafford 51,410 52,254 

PLUS 18,695 19,001 

Consolidation 48,999 45,518 

Total Disbursements $ 142,472 $ 140,525 

The allocation of disbursements for the first three loan types is estimated based on historical trend information.

Student and parent borrowers may prepay existing loans without penalty through a new consolidation loan. Under the 

FCRA and requirements provided by OMB regulations, the retirement of direct loans being consolidated is considered a 

collection of principal and interest. This receipt is offset by the disbursement related to the newly created consolidation 

loan. Underlying direct or guaranteed loans, performing or nonperforming, are paid off in their original cohort; new 

consolidation loans are originated in the cohort in which the new consolidation loan was obligated. Consolidation activity 

is taken into consideration in establishing subsidy rates for defaults and other cash flows. The cost of new consolidations 

is included in subsidy expense for the current-year cohort; the effect of prepayments on existing loans could contribute 

to re-estimates of prior cohort subsidy costs. The net receivables include estimates of future prepayments of existing loans 

through consolidations; they do not reflect subsidy costs associated with anticipated future consolidation loans.

Direct loan consolidations were $49.0 billion during FY 2017 and $45.5 billion during FY 2016. Under the FCRA, the 

subsidy costs of new consolidation loans are not reflected until the future fiscal year in which they are disbursed. The effect 

of the early payoff of the existing loans—those being consolidated—is recognized in the future projected cash flows of the 

past cohort year in which the loans were originated. 

Federal Family Education Loan Program. As a result of the SAFRA Act, no new FFEL loans have been made since July 

1, 2010. Federal guarantees on FFEL program loans and commitments remain in effect for loans made before July 1, 

2010, unless they were sold to the Department through an ECASLA program (acquired FFEL loans), consolidated into a 

direct loan, or otherwise satisfied, discharged, or cancelled. As of September 30, 2017 and 2016, total principal balances 

outstanding of guaranteed loans held by lenders were approximately $176 billion and $197 billion, respectively. As of 

September 30, 2017 and 2016, the estimated maximum government exposure on outstanding guaranteed loans held by 

lenders was approximately $173 billion and $193 billion, respectively. Of the insured amount, the Department would pay 

a smaller amount to the guaranty agencies. The rates range from 75 to 100 percent of the loan value depending on when 

the loan was made and the guaranty agency’s claim experience.
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

NOTES TO THE FINANCIAL STATEMENTS | FINANCIAL SECTION

53

FFEL Program Loan Receivables 

(Dollars in Millions)

Principal Accrued Interest Allowance for 

Subsidy Net

2017

DEFAULTED FFEL GURANTEED LOANS

FFEL GSL Program (Pre-1992) $ 3,882 $ 5,659 $ (8,019) $ 1,522 

FFEL GSL Program (Post-1991) 34,395 7,216 (13,838) 27,773 

Total Defaulted FFEL Guaranteed Loans 38,277 12,875 (21,857) 29,295 

ACQUIRED FFEL LOANS

Loan Purchase Commitment 21,375 2,224 1,656 25,255 

Loan Participation Purchase 40,288 3,947 2,072 46,307 

ABCP Conduit 1,661 292 (400) 1,553 

Total Acquired FFEL Loans 63,324 6,463 3,328 73,115 

FFEL Program Loan Receivables $ 101,601 $ 19,338 $ (18,529) $ 102,410 

2016

DEFAULTED FFEL GURANTEED LOANS

FFEL GSL Program (Pre-1992) $ 4,087 $ 5,674 $ (7,622) $ 2,139 

FFEL GSL Program (Post-1991) 35,645 6,562 (12,398) 29,809 

Total Defaulted FFEL Guaranteed Loans 39,732 12,236 (20,020) 31,948 

ACQUIRED FFEL LOANS

Loan Purchase Commitment 23,867 2,090 2,922 28,879 

Loan Participation Purchase 44,434 3,600 4,347 52,381 

ABCP Conduit 1,771 265 (374) 1,662 

Total Acquired FFEL Loans 70,072 5,955 6,895 82,922 

FFEL Program Loan Receivables $ 109,804 $ 18,191 $ (13,125) $ 114,870 

The balances of defaulted and acquired FFEL loans as of September 30, 2017 and 2016, are presented below.
54 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | NOTES TO THE FINANCIAL STATEMENTS

The following schedule provides a reconciliation between the beginning and ending balances of the liability for the 

outstanding portfolio of insured FFEL loans. This liability is included as a component of other liabilities on the balance 

sheet (see Note 9).

Other activity includes negative special allowance collections, collections on defaulted FFEL loans, guaranty agency 

expenses, and loan cancellations due to death, disability, or bankruptcy.

The following schedules provide reconciliations between the beginning and ending balances of the allowance for subsidy 

for the acquired FFEL portfolio.

Loan Purchase Commitment Reconciliation of Allowance for Subsidy 

(Dollars in Millions)

2017 2016

Beginning Balance, Allowance for Subsidy $ (2,922) $ (4,410)

Activity

Subsidy Allowance Amortization 635 644

Loan Cancellations (203) (193)

Direct Asset Activities (45) (40)

Total Activity 387 411

Upward Subsidy Re-estimates 879 1,077

Ending Balance, Allowance for Subsidy $ (1,656) $ (2,922)

FFEL Program Reconciliation of Liabilities for Loan Guarantees 

(Dollars in Millions)

2017 2016

Beginning Balance, FFEL Financing Account Liability for Loan Guarantees $ 1,417 $ (3,398)

Activity 

Interest Supplement Payments (810) (830)

Claim Payments (5,819) (6,678)

Fee Collections 1,633 1,731

Interest on Subsidy Amortization (1,263) (1,766)

Other 7,459 5,648

Total Activity 1,200 (1,895)

Components of Loan Modifications

Loan Modification Costs - 151

Modification Adjustment Transfers - 24

Loan Modifications - 175

Upward Subsidy Re-estimates 1,019 6,535

Ending Balance, FFEL Financing Account Liability for Loan Guarantees 3,636 1,417

FFEL Liquidating Account Liability for Loan Guarantees 23 12

FFEL Liabilities for Loan Guarantees $ 3,659 $ 1,429
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

NOTES TO THE FINANCIAL STATEMENTS | FINANCIAL SECTION

55

FFEL Program Subsidy Expense 

(Dollars in Millions)

2017 2016

Upward Subsidy Re-estimates

FFEL Loan Guarantee Program $ 1,019 $ 6,535

Loan Purchase Commitment 879 1,077

Loan Participation Purchase 1,513 2,447

Total FFEL Program Upward Subsidy Re-estimates 3,411 10,059

FFEL Guaranteed Loan Program Modification Costs - 175

FFEL Program Subsidy Expense $ 3,411 $ 10,234

Loan Participation Purchase Reconciliation of Allowance for Subsidy 

(Dollars in Millions)

2017 2016

Beginning Balance, Allowance for Subsidy $ (4,347) $ (7,573)

Activity

Subsidy Allowance Amortization 1,219 1,208

Loan Cancellations (390) (355)

Direct Asset Activities (67) (74)

Total Activity 762 779

Upward Subsidy Re-estimates 1,513 2,447

Ending Balance, Allowance for Subsidy $ (2,072) $ (4,347)

The following schedule provides FFEL program subsidy expense for the years ended September 30, 2017 and 

2016, respectively:

FFEL subsidy cost was adjusted upward by $3.4 billion in FY 2017. The net upward re-estimates in these programs were 

due primarily to interest rates provided by OMB and updated prepayment rates. Subsidy rates are sensitive to interest 

rate fluctuations; for example, a 1 percent increase in borrower interest rates and the guaranteed yield for lenders would 

increase projected FFEL subsidy costs by $15.1 billion.

FFEL re-estimated subsidy cost was adjusted upward by $10.2 billion in FY 2016. The net upward re-estimates in these 

programs were due primarily to collection rates on defaulted loans which were lower than anticipated.
56 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | NOTES TO THE FINANCIAL STATEMENTS

TEACH Subsidy Rates—Cohort 2017

Interest Differential Defaults Fees Other Total

Subsidy Rates 8.60% 0.20% 0.00% 6.17% 14.97%

OTHER CREDIT PROGRAMS FOR HIGHER EDUCATION

Receivables, Net for Other Credit Programs for Higher Education 

(Dollars in Millions)

Principal Accrued Interest Allowance for 

Subsidy Net

2017

Federal Perkins Loans $ 424 $ 268 $ (197) $ 495

TEACH Program Loans 723 95 (225) 593

HEAL Program Loans 398 30 (74) 354

Facilities Loan Programs 1,612 16 (315) 1,313

Total $ 3,157 $ 409 $ (811) $ 2,755

2016

Federal Perkins Loans $ 385 $ 242 $ (178) $ 449

TEACH Program Loans 698 101 (109) 690

HEAL Program Loans 405 31 (99) 337

Facilities Loan Programs 1,500 15 (163) 1,352

Total $ 2,988 $ 389 $ (549) $ 2,828

Federal Perkins Loan Program. The Federal Perkins Loan program provides low-interest loans to eligible postsecondary 

school students. In some statutorily defined cases, funds are provided to reimburse schools for loan cancellations. For 

defaulted loans assigned to the Department, collections of principal, interest, and fees, net of amounts paid by the 

Department to cover contract collection costs, are transferred to Treasury annually.

TEACH Grant Program. The Department awards annual grants of up to $4,000 to eligible undergraduate and graduate 

students who agree to serve as full-time mathematics, science, foreign language, bilingual education, special education, 

or reading teachers at high-need schools for four years within eight years of graduation. The maximum lifetime grant 

for students is $16,000 for undergraduate programs and $8,000 for graduate programs. For students failing to fulfill the 

service requirement, the grants are converted to direct unsubsidized Stafford Loans. Since grants can be converted to direct 

loans, for budget and accounting purposes, the program is operated as a loan program under the FCRA.

The subsidy rates applicable to the 2017 loan cohort year follow:
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

NOTES TO THE FINANCIAL STATEMENTS | FINANCIAL SECTION

57

Administrative Expenses 

(Dollars in Millions)

2017 2016

Direct Loan Program FFEL Program Direct Loan Program FFEL Program

Operating Expense $ 1,200 $ 144 $ 721 $ 465

Other Expense 19 3 50 33 

Total $ 1,219 $ 147 $ 771 $ 498

HEAL Program. The Department assumed responsibility in FY 2014 for the HEAL program and the authority to 

administer, service, collect, and enforce the program. The HEAL program is structured as required by the FCRA. A 

liquidating account is used to record all cash flows to and from the government resulting from guaranteed HEAL loans 

committed prior to 1992. All loan activity for 1992 and beyond is recorded in corresponding financing accounts.

Facilities Loan Programs. The Department also administers the HBCU Capital Financing program. Since 1992, 

this program has given HBCUs access to financing for the repair, renovation, and, in exceptional circumstances, the 

construction or acquisition of facilities, equipment, and infrastructure through federally insured bonds. The Department 

has authorized a designated bonding authority to make loans to eligible institutions, charge interest, and collect principal 

and interest payments. In compliance with HEA, as amended, the bonding authority maintains an escrow account to pay 

the principal and interest on bonds for loans in default. 

The total amount of support for HBCU programs, along with any accrued interest and unpaid servicing fees, will be 

capitalized to principal and be reamortized through the original maturity date of June 1, 2037. The Department has 

approximately $1.6 billion in outstanding borrowing from the FFB to support loans made to HBCU institutions and 

$242 million obligated to support near term lending as of September 30, 2017.

The Department administers the College Housing and Academic Facilities Loan program, the College Housing Loan 

program, and the Higher Education Facilities Loan program. From 1952 to 1993, these programs provided low-interest 

financing to institutions of higher education for the construction, reconstruction, and renovation of housing, academic, 

and other educational facilities.

ADMINISTRATIVE EXPENSES

Administrative expenses, for the years ended September 30, 2017 and 2016, consisted of the following:

Administrative expenses are allocated between Direct Loan and FFEL programs based on estimates. The Department 

revised the estimation process in 2017. The revised process estimates (by program) the number of applications processed, 

number of loans serviced, dollar amount of loan originations, cost of school compliance actions, and the cost to collect 

defaulted loans. The revised process is more robust than the process used in previous years and results in a higher 

percentage of costs being allocated to the Direct Loan program.
58 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | NOTES TO THE FINANCIAL STATEMENTS

NOTE 7. Debt

Debt, as of September 30, 2017 and 2016, consisted of the following:

NOTE 6. Liabilities Not Covered by Budgetary Resources

Liabilities not covered by budgetary resources include liabilities for which congressional action is needed before 

budgetary resources can be provided. Although future appropriations to fund these liabilities are likely, it is not certain 

that appropriations will be enacted to fund these liabilities.

Debt 

(Dollars in Millions)

Beginning Balance Borrowing Repayments Ending Balance

2017

Direct Loan Program $ 994,285 $ 160,508 $ (93,234) $ 1,061,559

FFEL Program 131,347 - (15,057) 116,290

Other Credit Programs for Higher Education 2,191 255 (224) 2,222

Total $ 1,127,823 $ 160,763 $ (108,515) $ 1,180,071

2016

Direct Loan Program $ 909,927 $ 146,992 $ (62,634) $ 994,285

FFEL Program 139,771 160 (8,584) 131,347

Other Credit Programs for Higher Education 2,078 224 (111) 2,191

Total $ 1,051,776 $ 147,376 $ (71,329) $ 1,127,823 

Liabilities Not Covered by Budgetary Resources

(Dollars in Millions)

2017 2016

Intragovernmental With the Public Intragovernmental With the Public

Liabilities Not Covered By Budgetary Resources

Subsidy Due to Treasury General Fund $ 1,784 $ - $ 2,429 $ - 

Other Liabilities

 Federal Perkins Loan Program 482 - 437 - 

 Accrued Unfunded Annual Leave - 40 - 40 

 FECA Liabilities 3 14 8 1 

 Custodial Liabilities - - 2 - 

Total Liabilities Not Covered By Budgetary Resources $ 2,269 $ 54 $ 2,876 $ 41 

Total Liabilities Covered By Budgetary Resources 1,187,448 12,312 1,129,411 9,642 

Total Liabilities $ 1,189,717 $ 12,366 $ 1,132,287 $ 9,683 
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

NOTES TO THE FINANCIAL STATEMENTS | FINANCIAL SECTION

59

Subsidy Due to Treasury General Fund 

(Dollars in Millions)

2017 2016

Credit Program Downward Subsidy Re-estimates

Direct Loan Program $ 5,010 $ - 

FFEL Program 219 213 

Total Credit Program Downward Subsidy Re-estimates 5,229 213 

Future Liquidating Account Collections

FFEL Program 1,614 2,253 

Other Credit Programs for Higher Education 170 176 

Total Future Liquidating Account Collections 1,784 2,429 

Total Subsidy Due to Treasury General Fund $ 7,013 $ 2,642 

The Department borrows from Treasury to fund the disbursement of new loans and the payment of credit program outlays 

and related costs. During FY 2017, debt increased 4.6 percent from $1,127.8 billion in the prior year to $1,180.1 billion. 

The Department makes periodic principal payments after considering the cash position and liability for future outflows in 

each cohort of loans, as mandated by the FCRA.

Approximately 90.0 percent of the Department’s debt, as of September 30, 2017, is attributable to the Direct Loan 

program. The majority of the net borrowing activity (borrowing less repayments) for the year was designated for funding 

new Direct Loan disbursements.

The Department also borrows from Treasury for activity in the other credit programs for higher education. During FY 

2017, TEACH net borrowing of $(88.9) million was used for the advance of new grants and repayments of principal 

made to Treasury. In FY 2017, debt in HBCU increased by $81.5 million, or 5.7 percent. This total represents the 

aggregate of new bonds administered and repayments made on previously issued bonds.

NOTE 8. Subsidy Due to Treasury General Fund

When downward subsidy re-estimates are executed, the amounts will be transferred to the Treasury General Fund 

in the following fiscal year. Future liquidating account collections represent the net present value of estimated future 

excess collections (estimated collections in excess of estimated outlays) for the Department’s pre-1992 FFEL and HEAL 

loan programs.
60 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | NOTES TO THE FINANCIAL STATEMENTS

NOTE 9. Other Liabilities

Other liabilities, as of September 30, 2017 and 2016, consisted of the following:

Other Liabilities 

(Dollars in Millions)

2017 2016

Intragovernmental With the Public Intragovernmental With the Public

Accounts Payable $ 1 $ 4,191 $ 1 $ 3,966 

Accrued Grant Liability - 3,959 - 3,760 

Guaranty Agencies' Funds Due to Treasury 2,077 - 1,197 - 

Loan Guarantee Liability - 3,870 - 1,633 

Federal Perkins Loan Program 482 - 437 - 

Miscellaneous Receipt, Deposit Funds and Clearing Accounts 52 270 40 255 

Advances from Others and Deferred Credits 10 7 11 9 

Accrued Unfunded Annual Leave - 40 - 40 

FECA Liabilities 3 14 8 1 

Accrued Payroll and Benefits - 15 - 19 

Employer Contributions and Payroll Taxes 8 - 126 - 

Custodial Liabilities - - 2 - 

Total Other Liabilities $ 2,633 $ 12,366 $ 1,822 $ 9,683 
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

NOTES TO THE FINANCIAL STATEMENTS | FINANCIAL SECTION

61

NOTE 10. Gross Cost and Exchange Revenue by Program

Gross Cost and Exchange Revenue by Program 

(Dollars in Millions)

2017

FSA OESE OSERS Other Total

INCREASE COLLEGE ACCESS, QUALITY, AND COMPLETION

Gross Cost

Intragovernmental $ 36,054 $ - $ - $ 65 $ 36,119

With the Public 37,717 - - 4,453 42,170

Total Gross Program Costs 73,771 - - 4,518 78,289

Earned Revenue

Intragovernmental (5,335) - - (14) (5,349)

With the Public (30,490) - - (48) (30,538)

Total Program Earned Revenue (35,825) - - (62) (35,887)

Net Program Costs 37,946 - - 4,456 42,402 

IMPROVE PREPARATION FOR COLLEGE AND CAREER FROM BIRTH THROUGH 12TH GRADE, ESPECIALLY FOR CHILDREN WITH 

HIGH NEEDS

Gross Cost

Intragovernmental - 176 - - 176 

With the Public - 22,400 - 1 22,401 

Total Gross Program Costs - 22,576 - 1 22,577 

Earned Revenue

With the Public - (10) - - (10)

Total Program Earned Revenue - (10) - - (10)

Net Program Costs - 22,566 - 1 22,567 

ENSURE EFFECTIVE EDUCATIONAL OPPORTUNITIES FOR ALL STUDENTS

Gross Cost

Intragovernmental - - 16 36 52 

With the Public - - 16,370 836 17,206 

Total Gross Program Costs - - 16,386 872 17,258 

Earned Revenue

With the Public - - (10) (1) (11)

Total Program Earned Revenue - - (10) (1) (11)

Net Program Costs - - 16,376 871 17,247 

ENHANCE THE EDUCATION SYSTEM’S ABILITY TO CONTINUOUSLY IMPROVE

Gross Cost

Intragovernmental - - - 85 85 

With the Public - - - 2,037 2,037 

Total Gross Program Costs - - - 2,122 2,122 

Earned Revenue

With the Public - - - (59) (59)

Total Program Earned Revenue - - - (59) (59)

Net Program Costs - - - 2,063 2,063 

Net Cost of Operations $ 37,946 $ 22,566 $ 16,376 $ 7,391 $ 84,279 
62 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | NOTES TO THE FINANCIAL STATEMENTS

Gross Cost and Exchange Revenue by Program

(Dollars in Millions)

2016

FSA OESE OSERS Other Total

INCREASE COLLEGE ACCESS, QUALITY, AND COMPLETION

Gross Cost

Intragovernmental $ 35,692 $ - $ - $ 120 $ 35,812 

With the Public 57,340 - - 4,162 61,502 

Total Gross Program Costs 93,032 - - 4,282 97,314 

Earned Revenue

Intragovernmental (4,464) - - (6) (4,470)

With the Public (29,796) - - (50) (29,846)

Total Program Earned Revenue (34,260) - - (56) (34,316)

Net Program Costs 58,772 - - 4,226 62,998 

IMPROVE PREPARATION FOR COLLEGE AND CAREER FROM BIRTH THROUGH 12TH GRADE, ESPECIALLY FOR CHILDREN WITH 

HIGH NEEDS

Gross Cost

Intragovernmental - 183 - - 183 

With the Public - 22,179 - 1 22,180 

Total Gross Program Costs - 22,362 - 1 22,363 

Earned Revenue

Intragovernmental - (5) - - (5)

With the Public - (11) - - (11)

Total Program Earned Revenue - (16) - - (16)

Net Program Costs - 22,346 - 1 22,347 

ENSURE EFFECTIVE EDUCATIONAL OPPORTUNITIES FOR ALL STUDENTS

Gross Cost

Intragovernmental - - 105 35 140 

With the Public - - 15,973 812 16,785 

Total Gross Program Costs - - 16,078 847 16,925 

Earned Revenue

With the Public - - (10) (1) (11)

Total Program Earned Revenue - - (10) (1) (11)

Net Program Costs - - 16,068 846 16,914 

ENHANCE THE EDUCATION SYSTEM’S ABILITY TO CONTINUOUSLY IMPROVE

Gross Cost

Intragovernmental - - - 96 96 

With the Public - - - 2,025 2,025 

Total Gross Program Costs - - - 2,121 2,121 

Earned Revenue

With the Public - - - (58) (58)

Total Program Earned Revenue - - - (58) (58)

Net Program Costs - - - 2,063 2,063 

Net Cost of Operations $ 58,772 $ 22,346 $ 16,068 $ 7,136 $ 104,322 
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

NOTES TO THE FINANCIAL STATEMENTS | FINANCIAL SECTION

63

For the years ended September 30, 2017 and 2016, interest expense and revenues for credit programs consisted of 

the following:

NOTE 11: Credit Program Interest Expense and Revenues

Gross Interest 

Expense

Subsidy 

Amortization

Net Interest 

Expense

Gross Interest and Administrative 

Fee Revenue

Subsidy 

Amortization

Net Revenue

Intragovernmental With the Public Intragovernmental With the Public With the Public

2017

Direct Loan Program $ 31,286 $ - $ 31,286 $ 4,258 $ 50,304 $ (23,276) $ 31,286 

FFEL Program 4,661 (1,263) 3,398 1,071 4,234 (1,907) 3,398 

Other Credit Programs 

for Higher Education 69 - 69 20 81 (32) 69 

Total $ 36,016 $ (1,263) $ 34,753 $ 5,349 $ 54,619 $ (25,215) $ 34,753 

2016

Direct Loan Program $ 30,503 $ - $ 30,503 $ 3,943 $ 44,375 $ (17,815) $ 30,503 

FFEL Program 4,980 (1,766) 3,214 516 4,600 (1,902) 3,214 

Other Credit Programs 

for Higher Education 66 - 66 12 79 (25) 66 

Total $ 35,549 $ (1,766) $ 33,783 $ 4,471 $ 49,054 $ (19,742) $ 33,783 

Credit Program Interest Expense and Revenues 

(Dollars in Millions)
64 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | NOTES TO THE FINANCIAL STATEMENTS

NOTE 12. Statement of Budgetary Resources

The Statement of Budgetary Resources compares budgetary resources with the status of those resources. As of September 

30, 2017, budgetary resources were $398.5 billion and net agency outlays were $152.2 billion. As of September 30, 2016, 

budgetary resources were $335.0 billion and net agency outlays were $159.6 billion.

NEW OBLIGATIONS INCURRED AND UPWARD ADJUSTMENTS BY APPORTIONMENT TYPE AND CATEGORY

New obligations incurred and upward adjustments by apportionment type and category, as of September 30, 2017 and 

2016, consisted of the following:

2017 2016

DIRECT

Category A $ 2,186 $ 2,170

Category B 360,781 304,270

Exempt from Apportionment 13 638

Total Direct Apportionment 362,980 307,078

REIMBURSABLE

Category A 3 3

Category B 55 63

New Obligations Incurred and Upward Adjustments $ 363,038 $ 307,144

New Obligations Incurred and Upward Adjustments by Apportionment Type and Category 

(Dollars in Millions)

New obligations incurred and upward adjustments can be either direct or reimbursable. Reimbursable obligations are 

those financed by offsetting collections received in return for goods and services provided, while all other obligations are 

direct. The apportionment categories are determined in accordance with the guidance provided in OMB regulations. 

Category A apportionments are those resources that can be obligated in the current fiscal year 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.
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

NOTES TO THE FINANCIAL STATEMENTS | FINANCIAL SECTION

65

UNUSED BORROWING AUTHORITY

Unused borrowing authority and related changes in available borrowing authority, as of September 30, 2017 and 2016, 

consisted of the following:

The Department is given authority to draw funds from Treasury to finance the Direct Loan, FFEL, and other loan 

programs. Unused borrowing authority is a budgetary resource and is available to support obligations for these programs. 

The Department periodically reviews its borrowing authority balances in relation to its obligations, resulting in the 

withdrawal of unused amounts.

UNDELIVERED ORDERS AT THE END OF THE PERIOD

Undelivered orders, as of September 30, 2017 and 2016, consisted of the following:

Unused Borrowing Authority 

(Dollars in Millions)

2017 2016

Beginning Balance, Unused Borrowing Authority $ 60,991 $ 54,829

Current Year Borrowing Authority 166,601 167,400 

Funds Drawn from Treasury (160,763) (147,376)

Borrowing Authority Withdrawn (8,128) (13,862)

Ending Balance, Unused Borrowing Authority $ 58,701 $ 60,991

Undelivered Orders

(Dollars in Millions)

2017 2016

Budgetary $ 52,390 $ 50,019 

Non-Budgetary 75,665 73,366 

Undelivered Orders (Unpaid) $ 128,055 $ 123,385 

Budgetary undelivered orders represent the amount of goods and/or services ordered which have not been actually or 

constructively received. This amount includes any orders which may have been prepaid or advanced but for which delivery 

or performance has not yet occurred. Non-budgetary undelivered orders primarily represent undisbursed loan awards and 

related negative subsidy.
66 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | NOTES TO THE FINANCIAL STATEMENTS

Distributed Offsetting Receipts

(Dollars in Millions)

2017 2016

Negative Subsidies and Downward Re-estimates of Subsidies:

Direct Loan Program $ 18,849 $ 7,881 

FFEL Program 370 2,529 

Facilities Loan Programs 55 18 

TEACH Program - 5 

HEAL Program 18 21 

Total Negative Subsidies and Downward Re-estimates 19,292 10,454 

Other 270 312 

Distributed Offsetting Receipts $ 19,562 $ 10,766 

DISTRIBUTED OFFSETTING RECEIPTS

The majority of the distributed offsetting receipts line item on the SBR represents amounts paid from the Direct Loan 

program and FFEL program financing accounts to Treasury General Fund receipt accounts for downward current fiscal 

year executed subsidy re-estimates and negative subsidies. Distributed offsetting receipts, for the years ended September 

30, 2017 and 2016, consisted of the following:

EXPLANATION OF DIFFERENCES BETWEEN THE STATEMENT OF BUDGETARY RESOURCES AND THE 

BUDGET OF THE UNITED STATES GOVERNMENT

The FY 2019 Budget of the United States Government (President’s Budget), which presents the actual amounts for the 

year ended September 30, 2017, has not been published as of the issue date of these financial statements. The FY 2019 

President’s Budget is scheduled for release in February 2018. A reconciliation of the FY 2016 SBR to the FY 2018 

President’s Budget (FY 2016 actual amounts) for budgetary resources, obligations incurred, distributed offsetting receipts, 

and net outlays is presented below.

SBR to Budget of the United States Government

(Dollars in Millions)

Budgetary 

Resources

Obligations 

Incurred

Distributed Offsetting 

Receipts Net Outlays

Combined Statement of Budgetary Resources $ 335,015 $ 307,144 $ 10,766 $ 159,629 

Expired Funds (1,339) (433) - - 

 FFEL Guaranty Agency Amounts Included in the 

President’s Budget 8,332 8,333 - - 

Distributed Offsetting Receipts - - - 10,766 

Other 8 - (2) (4)

Budget of the United States Government1 $ 342,016 $ 315,044 $ 10,764 $ 170,391 

1

 Amounts obtained from the Appendix, Budget of the United States Government, FY 2018

Reconciling differences exist because the President’s Budget excludes expired funds. Additionally, the President’s Budget 

includes a public enterprise fund that reflects the gross obligations by the FFEL program for the estimated activity of the 

consolidated federal fund of the guaranty agencies. Ownership by the federal government is independent of the actual 

control of the assets. Since the actual operation of the federal fund is independent from the Department’s direct control, 

budgetary resources and obligations incurred are estimated and disclosed in the President’s Budget to approximate the 

gross activities of the combined federal fund. Amounts reported on the FY 2016 SBR for the federal fund are compiled by 

combining all guaranty agencies’ annual reports to determine a net valuation amount for the federal fund.
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

NOTES TO THE FINANCIAL STATEMENTS | FINANCIAL SECTION

67

NOTE 13. Reconciliation of Net Cost of Operations to Budget

The reconciliation of net cost of operations to budget reconciles the resources used to finance activities, both those received 

through budgetary resources and those received through other means, with the net cost of operations on the statement 

of net cost. This reconciliation provides an explanation of the differences between budgetary and financial (proprietary) 

accounting, as required by FASAB Standard No. 7, Accounting for Revenue and Other Financing Sources and Concepts 

for Reconciling Budgetary and Financial Accounting. 

Resources used to finance activities (section one) are reconciled with the net cost of operations by: (a) excluding resources 

used or generated for items not part of the net cost of operations (section two); and (b) including components of the net 

cost of operations that will not require or generate resources in the current period (section three). The primary resources 

used to finance activities that do not fund the net cost of operations include the acquisition of net credit program 

assets, the liquidation of liabilities for loan guarantees, and subsidy re-estimates accrued in the prior period. Significant 

components of the net cost of operations that will not generate or use resources in the current period include subsidy 

amortization, interest on the liability for loan guarantees, and increases in exchange revenue receivable from the public.

The reconciliation of net cost of operations to budget, as of September 30, 2017 and 2016, is presented below:

Reconciliation of Net Cost of Operations to Budget 

(Dollars in Millions)

2017 2016

RESOURCES USED TO FINANCE ACTIVITIES

New Obligations Incurred and Upward Adjustments $ 363,038 $ 307,144

Spending Authority from Offsetting Collections & Recoveries (186,509) (136,094)

Offsetting Receipts (19,562) (10,766)

Net Budgetary Resources Obligated 156,967 160,284

Imputed Financing From Costs Absorbed by Others 27 81

Other Financing Sources (25,461) (5,124)

Net Other Resources (25,434) (5,043)

Net Resources Used to Finance Activities 131,533 155,241

RESOURCES USED OR GENERATED FOR ITEMS NOT PART OF THE NET COST OF OPERATIONS

(Increase)/Decrease in Budgetary Resources Obligated but Not Yet Provided (3,777) 1,763

Resources that Fund Subsidy Re-estimates Accrued in Prior Period (28,006) (2,598)

Credit Program Collections 142,011 92,080

Acquisition of Fixed Assets (10) (11)

Acquisition of Net Credit Program Assets or Liquidation of Liabilities for Loan Guarantees (171,770) (161,826)

Resources from Non-Entity Activity 25,476 5,196

Net Resources That Do Not Finance the Net Cost of Operations (36,076) (65,396)

Net Resources Used to Finance the Net Cost of Operations 95,457 89,845

COMPONENTS OF THE NET COST OF OPERATIONS THAT WILL NOT REQUIRE OR GENERATE RESOURCES IN THE CURRENT PERIOD

Change in Depreciation 1 - 

Subsidy Amortization and Interest on the Liability for Loan Guarantees 23,953 17,977

Other 2 22

Total Components Not Requiring or Generating Resources 23,956 17,999

Increase/(Decrease) in Annual Leave Liability - 2

Accrued Re-estimates of Credit Subsidy Expense 134 28,006

Increase in Exchange Revenue Receivable from the Public (35,155) (31,611)

Accrued Interest with Treasury 1 1

Other (+/-) (114) 80

Total Components Requiring or Generating Resources in Future Periods (35,134) (3,522)

Total Components That Will Not Require or Generate Resources in the Current Period (11,178) 14,477

Net Cost of Operations $ 84,279 $ 104,322
68 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | NOTES TO THE FINANCIAL STATEMENTS

NOTE 14. Commitments and Contingencies

The Department discloses contingencies where any of 

the conditions for liability recognition are not met and 

there is at least a reasonable possibility that a loss or an 

additional loss may have been incurred in accordance 

with FASAB Standard No. 5, Accounting for Liabilities 

of the Federal Government. The following commitments 

are amounts for contractual arrangements that may 

require future financial obligations.

FUTURE MINIMUM LEASE PAYMENTS

The Department leases all or a portion of 16 privately 

owned and 10 publicly owned buildings in 20 cities. 

Estimated future minimum lease payments for the privately 

and publicly owned buildings are presented below.

GUARANTY AGENCIES

The Department may assist guaranty agencies 

experiencing financial difficulties. The Department has 

not done so in fiscal years 2017 or 2016 and does not 

expect to in future years. No provision has been made in 

the financial statements for potential liabilities.

FEDERAL PERKINS LOAN PROGRAM

The Federal Perkins Loan program provides financial 

assistance to eligible postsecondary school students. In 

FY 2017, the Department provided funding of 83.1 

percent of the capital used to make loans to eligible 

students through participating schools at 5 percent 

interest. The schools provided the remaining 16.9 percent 

of program funding. For the latest academic year that 

ended June 30, 2017, approximately 356 thousand loans 

were made totaling $885.4 million at 1,266 institutions, 

making an average of $2,488 per loan. The Department’s 

equity interest was approximately $6.3 billion as of June 

30, 2017.

Federal Perkins Loan program borrowers who meet 

statutory eligibility requirements—such as those who 

provide service as teachers in low-income areas or as 

Peace Corps or AmeriCorps VISTA volunteers, as well 

as those who serve in the military, law enforcement, 

nursing, or family services—may receive partial loan 

forgiveness for each year of qualifying service.

Future Minimum Lease Payments

(Dollars in Millions)

2017 2016

FY Amount FY Amount

2018 $ 73 2017 $ 74 

2019 77 2018 78 

2020 79 2019 80 

2021 81 2020 83 

2022 85 2021 85 

After 2022 86 After 2021 86 

 Total $ 481 Total $ 486 
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

NOTES TO THE FINANCIAL STATEMENTS 

| FINANCIAL SECTION

69

The Federal Perkins Loan program was scheduled to 

officially end on September 30, 2015. However, the 

program was extended through September 30, 2017 

by the Federal Perkins Loan Program Extension Act of 

2015 (Extension Act). The Extension Act eliminated 

the Perkins Loan grandfathering provisions that the 

Department had put in place, and establishes new 

eligibility requirements for undergraduate and graduate 

students to receive Perkins Loans. As of September 30, 

2017, the Department is no longer authorized to make 

new Perkins Loans.

LITIGATION AND OTHER CLAIMS 

The Department is involved in various lawsuits incidental 

to its operations. In the opinion of management, the 

ultimate resolution of pending litigation will not have a 

material impact on the Department’s financial position.

The cost of loan forgiveness related to borrower defense 

claims resulting from proprietary school closures reflected 

in the accompanying financial statements is limited 

to claims received through September 30, 2017. The 

final disposition of claims filed and those yet to be filed 

from schools closed before September 30, 2017, is not 

expected to have a material impact on these 

financial statements

OTHER MATTERS 

Some portion of the current-year financial assistance 

expenses (grants) may include funded recipient 

expenditures that are subsequently disallowed through 

program review or audit processes. In the opinion of 

management, the ultimate disposition of these matters 

will not have a material effect on the Department’s 

financial position.
70 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | REQUIRED SUPPLEMENTARY INFORMATION

United States Department of Education Combining Statement of Budgetary Resources 

For the Year Ended September 30, 2017

(Dollars in Millions)

Combined 

Budgetary

Non-Budgetary 

Credit Reform 

Financing Accounts

BUDGETARY RESOURCES

Unobligated Balance, Brought Forward, October 1 $ 12,392 $ 15,479 

Recoveries of Prior Year Unpaid Obligations 4,781 13,356 

Other Changes in Unobligated Balance (+ or -) (456) (18,277) 

Unobligated Balance from Prior Year Budget Authority, Net $ 16,717 $ 10,558 

Appropriations (Discretionary and Mandatory) 134,388 - 

Borrowing Authority (Discretionary and Mandatory) (Note 12) - 166,601 

Spending Authority from Offsetting Collections (Discretionary and Mandatory) 1,096 69,169 

Total Budgetary Resources $ 152,201 $ 246,328 

STATUS OF BUDGETARY RESOURCES

New Obligations Incurred and Upward Adjustments (Total) (Note 12) $ 139,923 $ 223,115 

Unobligated Balance, End of Year:

Apportioned, Unexpired Accounts 9,012 - 

Unapportioned, Unexpired Accounts 2,100 23,213 

Unexpired Unobligated Balance, End of Year $ 11,112 $ 23,213 

Expired Unobligated Balance, End of Year 1,166 - 

Unobligated Balance, End of Year (Total) $ 12,278 $ 23,213 

Total Status of Budgetary Resources $ 152,201 $ 246,328 

CHANGE IN OBLIGATED BALANCE

Unpaid Obligations

Unpaid Obligations, Brought Forward, October 1 $ 54,249 $ 76,624 

New Obligations Incurred and Upward Adjustments 139,923 223,115 

Outlays (Gross) (-) (132,553) (207,402) 

Recoveries of Prior Year Unpaid Obligations (-) (4,781) (13,356) 

Unpaid Obligations, End of Year $ 56,838 $ 78,981 

Uncollected Payments

Uncollected Payments, Federal Sources, Brought Forward, October 1 (-) $ (2) $ (4) 

Change in Uncollected Payments, Federal Sources (+ or -) - (588) 

Uncollected Payments, Federal Sources, End of Year (-) $ (2) $ (592) 

Memorandum (Non-Add) Entries

Obligated Balance, Start of Year (+ or -) $ 54,247 $ 76,620 

Obligated Balance, End of Year (+ or -) $ 56,836 $ 78,389 

BUDGET AUTHORITY AND OUTLAYS, NET

Budget Authority, Gross (Discretionary and Mandatory) $ 135,484 $ 235,770 

Actual Offsetting Collections (Discretionary and Mandatory) (-) (1,279) (166,942) 

Change in Uncollected Payments from Federal Sources (Discretionary and Mandatory) (+ or -) - (588) 

Recoveries of Prior Year Paid Obligations (Discretionary and Mandatory) (+ or -) (1) (439) 

Budget Authority, Net (Discretionary and Mandatory) $ 134,204 $ 67,801 

Outlays, Gross (Discretionary and Mandatory) $ 132,553 $ 207,402 

Actual Offsetting Collections (Discretionary and Mandatory) (-) (1,279) (166,942) 

Outlays, Net (Discretionary and Mandatory) 131,274 40,460 

Distributed Offsetting Receipts (-) (Note 12) (19,562) - 

Agency Outlays, Net (Discretionary and Mandatory) (Note 12) $ 111,712 $ 40,460 
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

REQUIRED SUPPLEMENTARY INFORMATION | FINANCIAL SECTION

71

Federal Student Aid Office of Elementary and 

Secondary Education

Office of Special Education and 

Rehabilitative Services Other

Total

Budgetary

Non-Budgetary 

Credit Reform 

Financing 

Accounts

Budgetary Budgetary Budgetary

Non-Budgetary 

Credit Reform 

Financing 

Accounts

$ 10,384 $ 15,303 $ 913 $ 161 $ 934 $ 176 $ 27,871

3,919 13,356 454 233 175 - 18,137

(239) (18,270) (55) (64) (98) (7) (18,733)

$ 14,064 $ 10,389 $ 1,312 $ 330 $ 1,011 $ 169 $ 27,275

88,321 - 22,197 16,582 7,288 - 134,388

- 166,426 - - - 175 166,601

1,037 68,906 - - 59 263 70,265

$ 103,422 $ 245,721 $ 23,509 $ 16,912 $ 8,358 $ 607 $ 398,529

$ 92,308 $ 222,838 $ 23,304 $ 16,601 $ 7,710 $ 277 $ 363,038

8,595 - 144 2 271 - 9,012

2,093 22,883 - - 7 330 25,313

$ 10,688 $ 22,883 $ 144 $ 2 $ 278 $ 330 $ 34,325

426 - 61 309 370 - 1,166

$ 11,114 $ 22,883 $ 205 $ 311 $ 648 $ 330 $ 35,491

$ 103,422 $ 245,721 $ 23,509 $ 16,912 $ 8,358 $ 607 $ 398,529

$ 20,216 $ 76,389 $ 15,314 $ 9,328 $ 9,391 $ 235 $ 130,873

92,308 222,838 23,304 16,601 7,710 277 363,038

(86,205) (207,131) (22,505) (16,233) (7,610) (271) (339,955)

(3,919) (13,356) (454) (233) (175) - (18,137)

$ 22,400 $ 78,740 $ 15,659 $ 9,463 $ 9,316 $ 241 $ 135,819

$ - $ (4) $ - $ - $ (2) $ - $ (6)

- (588) - - - - (588)

$ - $ (592) $ - $ - $ (2) $ - $ (594)

$ 20,216 $ 76,385 $ 15,314 $ 9,328 $ 9,389 $ 235 $ 130,867

$ 22,400 $ 78,148 $ 15,659 $ 9,463 $ 9,314 $ 241 $ 135,225

$ 89,358 $ 235,332 $ 22,197 $ 16,582 $ 7,347 $ 438 $ 371,254

(1,219) (166,641) - - (60) (301) (168,221)

- (588) - - - - (588)

 (1) (439) - - - - (440)

$ 88,138 $ 67,664 $ 22,197 $ 16,582 $ 7,287 $ 137 $ 202,005

$ 86,205 $ 207,131 $ 22,505 $ 16,233 $ 7,610 $ 271 $ 339,955

(1,219) (166,641) - - (60) (301) (168,221)

84,986 40,490 22,505 16,233 7,550 (30) 171,734

(19,438) - - - (124) - (19,562)

$ 65,548 $ 40,490 $ 22,505 $ 16,233 $ 7,426 $ (30) $ 152,172
72 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | REQUIRED SUPPLEMENTARY INFORMATION

United States Department of Education Combining Statement of Budgetary Resources 

For the Year Ended September 30, 2016

(Dollars in Millions)

Combined 

Budgetary

Non-Budgetary 

Credit Reform 

Financing Accounts

BUDGETARY RESOURCES

Unobligated Balance, Brought Forward, October 1 $ 14,774 $ 14,437 

Recoveries of Prior Year Unpaid Obligations 746 21,047 

Other Changes in Unobligated Balance (+ or -) (772) (24,695) 

Unobligated Balance from Prior Year Budget Authority, Net $ 14,748 $ 10,789 

Appropriations (Discretionary and Mandatory) 87,924 24 

Borrowing Authority (Discretionary and Mandatory) (Note 12) - 167,400 

Spending Authority from Offsetting Collections (Discretionary and Mandatory) 522 53,608 

Total Budgetary Resources $ 103,194 $ 231,821 

STATUS OF BUDGETARY RESOURCES

New Obligations Incurred and Upward Adjustments (Total) (Note 12) $ 90,802 $ 216,342 

Unobligated Balance, End of Year:

Apportioned, Unexpired Accounts 10,280 - 

Unapportioned, Unexpired Accounts 1,212 15,479 

Unexpired Unobligated Balance, End of Year $ 11,492 $ 15,479 

Expired Unobligated Balance, End of Year 900 - 

Unobligated Balance, End of Year (Total) $ 12,392 $ 15,479 

Total Status of Budgetary Resources $ 103,194 $ 231,821 

CHANGE IN OBLIGATED BALANCE

Unpaid Obligations

Unpaid Obligations, Brought Forward, October 1 $ 52,645 $ 78,116 

New Obligations Incurred and Upward Adjustments 90,802 216,342 

Outlays (Gross) (-) (88,452) (196,787) 

Recoveries of Prior Year Unpaid Obligations (-) (746) (21,047) 

Unpaid Obligations, End of Year $ 54,249 $ 76,624 

Uncollected Payments

Uncollected Payments, Federal Sources, Brought Forward, October 1 (-) $ (3) $ (26) 

Change in Uncollected Payments, Federal Sources (+ or -) 1 22 

Uncollected Payments, Federal Sources, End of Year (-) $ (2) $ (4) 

Memorandum (Non-Add) Entries

Obligated Balance, Start of Year (+ or -) $ 52,642 $ 78,090 

Obligated Balance, End of Year (+ or -) $ 54,247 $ 76,620 

BUDGET AUTHORITY AND OUTLAYS, NET

Budget Authority, Gross (Discretionary and Mandatory) $ 88,446 $ 221,032 

Actual Offsetting Collections (Discretionary and Mandatory) (-) (721) (114,123) 

Change in Uncollected Payments from Federal Sources (Discretionary and Mandatory) (+ or -) 1 22 

Recoveries of Prior Year Paid Obligations (Discretionary and Mandatory) (+ or -) (1) (516) 

Budget Authority, Net (Discretionary and Mandatory) $ 87,725 $ 106,415 

Outlays, Gross (Discretionary and Mandatory) $ 88,452 $ 196,787 

Actual Offsetting Collections (Discretionary and Mandatory) (-) (721) (114,123) 

Outlays, Net (Discretionary and Mandatory) 87,731 82,664 

Distributed Offsetting Receipts (-) (Note 12) (10,766) - 

Agency Outlays, Net (Discretionary and Mandatory) (Note 12) $ 76,965 $ 82,664 
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

REQUIRED SUPPLEMENTARY INFORMATION | FINANCIAL SECTION

73

Federal Student Aid Office of Elementary and 

Secondary Education

Office of Special Education and 

Rehabilitative Services Other

Total

Budgetary

Non-Budgetary 

Credit Reform 

Financing 

Accounts

Budgetary Budgetary Budgetary

Non-Budgetary 

Credit Reform 

Financing 

Accounts

$ 12,719 $ 14,236 $ 800 $ 273 $ 982 $ 201 $ 29,211

188 21,047 368 88 102 - 21,793

(374) (24,687) (87) (153) (158) (8) (25,467)

$ 12,533 $ 10,596 $ 1,081 $ 208 $ 926 $ 193 $ 25,537

41,948 24 22,145 16,493 7,338 - 87,948

- 167,272 - - - 128 167,400

470 53,563 3 - 49 45 54,130

$ 54,951 $ 231,455 $ 23,229 $ 16,701 $ 8,313 $ 366 $ 335,015

$ 44,567 $ 216,152 $ 22,316 $ 16,540 $ 7,379 $ 190 $ 307,144

8,782 - 846 - 652 - 10,280

1,212 15,303 - - - 176 16,691

$ 9,994 $ 15,303 $ 846 $ - $ 652 $ 176 $ 26,971

390 - 67 161 282 - 900

$ 10,384 $ 15,303 $ 913 $ 161 $ 934 $ 176 $ 27,871

$ 54,951 $ 231,455 $ 23,229 $ 16,701 $ 8,313 $ 366 $ 335,015

$ 19,286 $ 77,880 $ 14,950 $ 8,835 $ 9,574 $ 236 $ 130,761

44,567 216,152 22,316 16,540 7,379 190 307,144

(43,449) (196,596) (21,584) (15,959) (7,460) (191) (285,239)

(188) (21,047) (368) (88) (102) - (21,793)

$ 20,216 $ 76,389 $ 15,314 $ 9,328 $ 9,391 $ 235 $ 130,873

$ - $ (4) $ - $ - $ (3) $ (22) $ (29)

- - - - 1 22 23

$ - $ (4) $ - $ - $ (2) $ - $ (6)

$ 19,286 $ 77,876 $ 14,950 $ 8,835 $ 9,571 $ 214 $ 130,732

$ 20,216 $ 76,385 $ 15,314 $ 9,328 $ 9,389 $ 235 $ 130,867

$ 42,418 $ 220,859 $ 22,148 $ 16,493 $ 7,387 $ 173 $ 309,478

(653) (113,986) - - (68) (137) (114,844)

- - - - 1 22 23

(1) (516) - - - - (517)

$ 41,764 $ 106,357 $ 22,148 $ 16,493 $ 7,320 $ 58 $ 194,140

$ 43,449 $ 196,596 $ 21,584 $ 15,959 $ 7,460 $ 191 $ 285,239

(653) (113,986) - - (68) (137) (114,844)

42,796 82,610 21,584 15,959 7,392 54 170,395

(10,684) - - - (82) - (10,766)

$ 32,112 $ 82,610 $ 21,584 $ 15,959 $ 7,310 $ 54 $ 159,629
74 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

REQUIRED SUPPLEMENTARY 

STEWARDSHIP INFORMATION

OMB requires each federal agency to report on 

its stewardship over various resources entrusted 

to it and certain responsibilities assumed by 

it that cannot be measured and conveyed through 

traditional financial reports. These elements do not 

meet the criteria for assets and liabilities required in the 

preparation of the Department’s financial statements and 

accompanying footnotes, but are nonetheless important 

to understanding the agency’s financial condition, 

strategic goals, and related program outcomes.

STEWARDSHIP EXPENSES

Stewardship expenses are substantial investments made by 

the federal government for the long-term benefit of the 

nation. Because costs of stewardship resources are treated 

as expenses in the financial statements in the year the costs 

are incurred, they are reported as Required Supplementary 

Stewardship Information to highlight their benefit and to 

demonstrate accountability for their use.

In the United States, the structure of education finance 

is such that state and local governments play a much 

greater overall role than the federal government. Of the 

estimated more than $1 trillion spent nationally on all 

levels of education, the majority of funding comes from 

state, local, and private sources. In the area of elementary 

and secondary education, nearly 90 percent of resources 

come from nonfederal sources. These funds serve over 50 

million students enrolled in public, private, and charter 

schools in the United States and its territories, according 

to the National Center for Education Statistics. See the 

National Center for Education Statistics Condition of 

Education for more information.

With its relatively small role in total education funding, 

the Department strives to create the greatest number of 

favorable program outcomes with a limited amount of 

taxpayer-provided resources. This is accomplished by 

targeting areas in which funds will go the furthest in 

doing the most good. Accordingly, federal funding is used 

to provide grant, loan, loan-forgiveness, work-study, and 

other assistance to more than 20 million postsecondary 

students. The majority of the Department’s $340.0 

billion in gross outlays during FY 2017 was attributable 

to Direct Loan disbursements administered by FSA. 

Grant-based activity under discretionary, formula, 

and need-based formats primarily accounted for the 

remainder of the outlays. 

Discretionary grants, such as the Federal TRIO 

Programs and the Teacher Incentive Fund, are awarded 

on a competitive basis. When funds for these grants are 

exhausted, they cease to be funded. The Department 

reviews discretionary grant applications using:

 a formal review process for selection,

 both legislative and regulatory requirements, and

 published selection criteria established for 

individual programs.

Formula grants, such as Title I and Title III of the 

Elementary and Secondary Education Act, are not 

competitive. The majority go to school districts, as 

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

 provide funds as dictated by a law and

 allocate funds to districts on a per-student basis. 

Need-based grants, including the Pell Grant, Federal 

Work Study, and the Federal Supplemental Educational 

Opportunity Grant, are based on family income and 

economic eligibility. While there are many state, 

institutionally (college or school), and privately sourced 

need-based grants, most need-based grants 

are funded by the federal government where the 

financial aid formula is determined by a combination 

of factors, including:

 family income and discretionary assets,

 expected family contribution, and

 dependency status of the student and other 

members of their family.
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION | FINANCIAL SECTION

75

Further details on financial figures and programlevel goals can be viewed in the Department’s 2017 

Budget Summary.

INVESTMENT IN HUMAN CAPITAL

Human capital investments are defined similarly by 

OMB, in Circular A-136, and the Statement of Federal 

Financial Accounting Standards No. 8, Supplementary 

Stewardship Reporting. These investments are expenses 

included in net cost for education and training programs 

intended to increase or maintain national economic 

productive capacity and produce outputs and outcomes 

that provide evidence of maintaining or increasing 

national productive capacity.

Supplementing state and local government funding, the 

Department utilizes its annual appropriations and outlay 

authority to foster human capital improvements across 

the nation by supporting programs along the entire 

spectrum of education. Direct Loans, guaranteed loans, 

grants, and technical program assistance are administered 

and monitored by FSA and numerous other programaimed components of the Department. The Institute 

of Education Sciences is the independent nonpartisan 

research arm of the Department that aims to present 

scientific evidence on which to ground education practice 

and policy while providing useful information to all 

stakeholders in the arena of American education. Further 

details of the major offices/programs applicable to this 

section are described below:

Federal Student Aid. Federal Student Aid is the part of 

the Department that administers need-based financial 

assistance programs for students pursuing postsecondary 

education and makes federal grants, direct loans, 

guaranteed loans and work-study funding available to 

eligible undergraduate and graduate students.

Federal Student Aid’s programs link the overall 

initiatives of the Department in enhancing education—a 

fundamental stepping-stone to higher living standards for 

American citizens. While education is vital to national 

economic growth, education’s contribution is more than 

increased productivity and incomes. Education improves 

health, promotes social change, and opens doors to a 

better future for children and adults.

Direct Loan Subsidy. The William D. Ford Federal 

Direct Loan (Direct Loan) program is a direct-lending 

program in which loan capital is provided to students 

by the federal government through borrowings from the 

United States (U.S.) Department of Treasury.

Federal Family Education Loan (FFEL) Program 

Subsidy. The FFEL Loan program has originated no 

new loans since June 30, 2010; however, its permanent 

budget authority allows it to continue to operate with 

state and private nonprofit guaranty agencies to honor 

loan guarantees and for the Department to pay interest 

supplements on outstanding loans by private lenders 

to eligible students. The FFEL Loan program expenses 

include the Loan Participation Purchase, Loan Purchase 

Commitment, and ABCP Conduit expenses.

Perkins Loans, Pell and Other Grants. Perkins Loan 

and Grant programs include the Pell Grant program that 

awards direct grants through participating institutions to 

undergraduate students with financial need. Participating 

institutions either credit the appropriated funds to the 

student’s school account or pay the student directly once 

per term.

The Teacher Education Assistance for College and 

Higher Education (TEACH) Grant Program. The 

TEACH Grant program awards annual grants to students 

who agree to teach in a high-need subject area in a public 

or private elementary or secondary school that serves 

low-income students. If the students do not satisfy their 

agreement to serve, the grants are converted to Direct 

Unsubsidized Loans. The President’s Budget proposes to 

overhaul the TEACH Grant program, and replace it with 

a new, targeted teacher recruitment and retention program 

called the Presidential Teaching Fellows. This new program 

would provide grants to states that meet certain conditions 

to supply scholarships of up to $10,000 to talented 

individuals attending the most effective programs in the 

state. These individuals would commit to teaching for at 

least three years in a high-need school and subject. To be 

eligible for funds, states would measure the effectiveness of 

their teacher preparation programs based on the student 

achievement data of their graduates among other measures; 

hold teacher preparation programs accountable for results; 

and upgrade licensure and certification standards.
76 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION

Office of Elementary and Secondary Education 

(OESE). OESE promotes academic excellence, enhances 

educational opportunities and equity for all of America’s 

children and families, and improves quality of teaching 

and learning by providing leadership, technical assistance 

and financial support. 

Office of Special Education and Rehabilitative Services 

(OSERS). OSERS is committed to the broad values of 

Inclusion, Equity and Opportunity for infants, toddlers, 

children, youth, and adults with disabilities to actively 

participate in all aspects of life. OSERS promotes 

inclusion, ensures equity and creates opportunity as it 

strives to improve results and outcomes for children and 

adults with disabilities. By providing funding to programs 

that serve infants, toddlers, children, and adults with 

disabilities, OSERS works to ensure that these individuals 

are fully included in school, in employment, and in 

life. OSERS also provides funds to programs that offer 

information and technical assistance to parents of infants, 

toddlers and children with disabilities, as well as members 

of the learning community who serve these individuals.

The following table illustrates the Department’s expenses 

paid for bolstering the nation’s human capital, broken out 

by the nature of the expense, for the last five years.

2017 2016 2015 2014 2013

FEDERAL STUDENT AID EXPENSE

Direct Loan Subsidy $ 5,329 $ 16,119 $ (892) $ 8,126 $ (39,557)

Federal Family Education Loan Program Subsidy 3,411 10,234 (3,856) (6,585) (8,753)

Perkins Loans, Pell and Other Grants 28,770 30,671 31,400 33,098 33,542

Program Operational Costs 224 308 242 206 222

 Subtotal 37,734 57,332 26,894 34,845 (14,546)

DEPARTMENTAL PROGRAMS

Elementary and Secondary Education 22,420 22,155 22,146 22,832 22,221

Special Education and Rehabilitative Services 16,294 15,944 15,751 15,948 15,919

American Recovery and Reinvestment Act and Education Jobs Fund - - - - 2,623

Other Departmental Programs 6,565 6,349 6,494 6,938 6,175

Program Operational Costs 419 625 511 667 703

 Subtotal 45,698 45,073 44,902 46,385 47,641

Grand Total $ 83,432 $ 102,405 $ 71,796 $ 81,230 $ 33,095

Table 2. Summary of Human Capital Expenses

(Dollars in Millions)

PROGRAM OUTCOMES 

Favorable results in the various programs administered 

by the Department can be interpreted in many ways. 

Accordingly, the effectiveness of the Department’s 

investments in human capital can be gauged by changes 

in the number of students who fully complete the 

requirements for earning a bachelor’s or associate’s degree. 

This often final stepping stone in one’s educational career 

correlates strongly with wage and/or salary increases due 

to the high-level skills expected by employers of graduates 

entering the labor force. Attaining a degree has proven 

to increase an individual’s job opportunity outlook for 

life, making them less susceptible to general economic 

downturns and allowing them to afford living expenses 

more comfortably; make debt payments, including 

student loans; and avoid delinquency and credit 

problems. Increased employability makes Americans 

more competitive in the global labor market, yielding 

lower unemployment, higher economic well-being, and 

greater national security.

One important method used in the area of analyzing 

student loan programs, borrower activity, and institution 

participation is the monitoring of default statistics. 

Each year, substantial stewardship expenses incurred 
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77

by the Department are aimed at lowering the number 

of defaulted loans, defaulted borrowers, and disbursed 

dollars going into default. This is done because every 

default—when a loan payment is missed for multiple 

months—results in loan funds that are not replenished, 

missed opportunities to invest in other degree-seeking 

human capital and additional resources used by the 

government in attempting to collect its money. Each 

aspect of a default costs American taxpayers, affects the 

federal budget, decreases economic well-being, and harms 

borrowers’ credit scores.

Although a direct and proven linkage does not exist 

between the two variables, the Department feels 

strongly about its ability to mitigate the risk of default 

through various efforts. Stewardship expenses for this 

postsecondary goal include those incurred to increase 

borrower awareness of repayment options, encouraging 

third-party loan servicers to work more effectively 

in helping students avoid default by devising viable 

repayment plans, and by working with financial aid 

offices around the country to help them improve the loan 

counseling provided to students who have yet to graduate 

or enter repayment.

Default statistics for the FY 2014 cohort of borrowers 

entering repayment were released at the end of FY 2017. 

Of the 5.0 million borrowers entering repayment from 

October 1, 2013, to September 30, 2014, 581,000 

defaulted on their loan before September 30, 2016. This 

borrower default rate of 11.5 percent across all institution 

types showed an increase from the prior year rate of 11.3 

percent for the 2013 cohort. It is important to note that 

this metric is unadjusted for loan program facets, such as 

consolidations and forbearance.

Trends in default rates, among other indicating metrics 

monitored at the Department, continue to support proof 

of favorable outcomes within programs at all levels.

 

 
78 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

REPORT OF THE INDEPENDENT AUDITORS

UNITED STATES DEPARTMENT OF EDUCATION

OFFICE OF INSPECTOR GENERAL

 THE INSPECTOR GENERAL

400 MARYLAND AVENUE, S.W., WASHINGTON, DC 20202-1510

Promoting the efficiency, effectiveness, and integrity of the Department’s programs and operations.

November 13, 2017 

The Honorable Betsy DeVos

Secretary of Education

Washington, D.C. 20202

Dear Secretary DeVos: 

The enclosed report presents the results of the audit of the U.S. Department of Education’s 

(Department) financial statements for fiscal years 2017 and 2016 to comply with the Chief 

Financial Officers Act of 1990, as amended. The report should be read in conjunction with the 

Department’s financial statements and notes to fully understand the context of the information 

contained therein.

We contracted with the independent certified public accounting firm of CliftonLarsonAllen, LLP 

(CliftonLarsonAllen) to audit the financial statements of the Department as of September 30, 

2017 and 2016, and for the years then ended. The contract requires that the audit be 

performed in accordance with U.S. generally accepted government auditing standards and 

Office of Management and Budget bulletin, Audit Requirements for Federal Financial 

Statements.

Results of the Independent Audit

CliftonLarsonAllen found: 

• The fiscal years 2017 and 2016 financial statements are presented fairly, in all material 

respects, in accordance with accounting principles generally accepted in the United 

States of America;

• Two significant deficiencies in internal control over financial reporting: 

o Controls over the Department’s Modeling Activities Need Improvement, and 

o Department and Federal Student Aid Management Need to Mitigate Persistent 

Information Technology Control Deficiencies; and 

• One instance of reportable noncompliance with Federal law related to referring 

delinquent student loan debts to Treasury.

Evaluation and Monitoring of Audit Performance

The Inspector General Act of 1978 requires that the Inspector General take appropriate steps to 

assure that any work performed by non-Federal auditors complies with the audit standards 
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

REPORT OF INDEPENDENT AUDITORS | FINANCIAL SECTION

79

Page 2 – The Honorable Betsy DeVos

established by the Comptroller General. In that regard, we evaluated the independence, 

objectivity, and qualifications of the auditors and specialists; reviewed the plan and approach of 

the audit; monitored the performance of the audit; reviewed CliftonLarsonAllen's reports and 

related audit documentation; and inquired of its representatives. 

Our review was not intended to enable us to express, and we do not express, an opinion on the 

Department’s financial statements, or conclusions about the effectiveness of internal control, 

whether the Department’s financial management systems substantially comply with the 

Federal Financial Management Improvement Act of 1996, or on compliance with certain 

provisions of laws, regulations, contracts, and grant agreements. 

CliftonLarsonAllen is responsible for the enclosed independent auditors’ report and the 

conclusions expressed on internal control and compliance. Our review disclosed no instances 

where CliftonLarsonAllen did not comply, in all material respects, with U.S. generally accepted 

government auditing standards.

We appreciate the cooperation given CliftonLarsonAllen and my office during the audit. If you 

have any questions or would like to discuss the report, please contact me at (202) 245-6900. 

Sincerely, 

Kathleen S. Tighe

Inspector General

Enclosure
80 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | REPORT OF INDEPENDENT AUDITORS

CliftonLarsonAllen LLP

www.cliftonlarsonallen.com

INDEPENDENT AUDITORS’ REPORT

Inspector General

United States Department of Education

Secretary

United States Department of Education

Report on the Financial Statements

We have audited the accompanying consolidated financial statements of the United States 

Department of Education (Department), which comprise the consolidated balance sheets as of 

September 30, 2017 and 2016, and the related consolidated statements of net cost and changes 

in net position, and the combined statement of budgetary resources for the years then ended, and 

the related notes to the consolidated financial statements (financial statements).

Management’s Responsibility for the Financial Statements

The Department’s management is responsible for the preparation and fair presentation of these 

financial statements in accordance with accounting principles generally accepted in the United 

States of America (U.S.); this includes the design, implementation, and maintenance of internal 

control relevant to the preparation and fair presentation of financial statements that are free from 

material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We 

conducted our audits in accordance with auditing standards generally accepted in the U.S.; the 

standards applicable to financial audits contained in Government Auditing Standards, issued by 

the Comptroller General of the United States; and Office of Management and Budget (OMB) 

Bulletin No. 17-03, Audit Requirements for Federal Financial Statements (OMB Bulletin 17-03).

Those standards and OMB Bulletin 17-03 require that we plan and perform the audits to obtain 

reasonable assurance about whether the financial statements are free from material 

misstatement. 

An audit involves performing procedures to obtain audit evidence about the amounts and 

disclosures in the financial statements. The procedures selected depend on the auditors’ 

judgment, including the assessment of the risks of material misstatement of the financial 

statements, whether due to fraud or error. In making those risk assessments, the auditor 

considers internal control relevant to the entity’s preparation and fair presentation of the financial 

statements in order to design audit procedures that are appropriate in the circumstances, but not 

for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. 

Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness 
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81

INDEPENDENT AUDITORS’ REPORT (Continued)

of accounting policies used and the reasonableness of significant accounting estimates made by 

management, as well as evaluating the overall presentation of the financial statements. 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a 

basis for our audit opinion.

Opinion on the Financial Statements

In our opinion, the consolidated financial statements referred to above present fairly, in all material 

respects, the financial position of the United States Department of Education as of September 30,

2017 and 2016, and its net costs, changes in net position, and budgetary resources for the years 

then ended, in accordance with accounting principles generally accepted in the U.S.

Other Matters

Required Supplementary Information

Accounting principles generally accepted in the U.S. require that the information in the 

Management’s Discussion and Analysis (MD&A), Required Supplementary Information (RSI), 

and Required Supplementary Stewardship Information (RSSI), included in the U.S. Department 

of Education’s FY 2017 Agency Financial Report, be presented to supplement the financial 

statements. Such information, although not a part of the financial statements, is required by the 

Federal Accounting Standards Advisory Board, who considers it to be an essential part of financial 

reporting for placing the financial statements in an appropriate operational, economic, or historical 

context. We have applied certain limited procedures to the MD&A, RSI, and RSSI in accordance 

with auditing standards generally accepted in the U.S., which consisted of inquiries of 

management about the methods of preparing the information and comparing the information for 

consistency with management's responses to our inquiries, the financial statements, and other 

knowledge we obtained during our audits of the financial statements. We do not express an 

opinion or provide any assurance on this information because the limited procedures do not 

provide us with sufficient evidence to express an opinion or provide any assurance.

Other Information

Our audits were conducted for the purpose of forming an opinion on the financial statements as 

a whole. The Message from the Secretary, Message from the Chief Financial Officer, Other 

Information, and Appendices in the U.S. Department of Education FY 2017 Agency Financial 

Report are presented for purposes of additional analysis and are not a required part of the 

financial statements or RSI. In addition, management has included references to information on 

websites or other data outside of the Agency Financial Report. This information has not been 

subjected to the auditing procedures applied in the audits of the financial statements, and 

accordingly, we do not express an opinion or provide any assurance on it.
82 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | REPORT OF INDEPENDENT AUDITORS

INDEPENDENT AUDITORS’ REPORT (Continued)

Report on Internal Control over Financial Reporting and on Compliance Based on an 

Audit of Financial Statements Performed in Accordance with Government Auditing 

Standards

Internal Control over Financial Reporting

In planning and performing our audit of the consolidated financial statements, we considered the 

Department’s internal control over financial reporting (internal control) to determine the audit 

procedures that are appropriate in the circumstances for the purpose of expressing our opinion 

on the financial statements, but not for the purpose of expressing an opinion on the effectiveness 

of the Department’s internal control or on management’s statement of assertion on internal control 

included in the MD&A. Accordingly, we do not express an opinion on the effectiveness of the 

Department’s internal control or on management’s assertion on internal control included in the 

MD&A.

A deficiency in internal control exists when the design or operation of a control does not allow 

management or employees, in the normal course of performing their assigned functions, to 

prevent, or detect and correct, misstatements on a timely basis. A material weakness is a 

deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable 

possibility that a material misstatement of the Department’s financial statements will not be 

prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or 

combination of deficiencies, in internal control that is less severe than a material weakness, yet 

important enough to merit attention by those charged with governance.

Our consideration of internal control was for the limited purpose described in the first paragraph 

of this section and was not designed to identify all deficiencies in internal control that might be 

material weaknesses or significant deficiencies and therefore, material weaknesses or significant 

deficiencies may exist that were not identified. Given these limitations, during our audit we did not 

identify any deficiencies in internal control that we consider to be material weaknesses. However, 

we identified certain deficiencies in internal control, described below and in more detail in Exhibit 

A, which we consider to be significant deficiencies.

Controls over the Department’s Modeling Activities Need Improvement

The Department maintains various models that apply mathematical techniques or 

statistical methods to historical student loan event data to estimate future loan 

performance and calculate the cost or value of the various student loan programs 

on a present value basis. In FY2016, we identified deficiencies in the controls over,

and documentation of, the Department’s processes for model design and 

development, risk assessment, model operation and validation, and oversight. We 

also identified certain deficiencies in the Department’s modeling for income-driven 

repayment (IDR) loans.

In FY2017, the Department implemented corrective actions to improve its controls 

over modeling activities, including the enhancement of the scope and 

responsibilities of the Credit Reform Working Group, the development of a model 

inventory and preliminary risk assessment. However, the Department’s FY2017 

model validation procedures identified potential areas for model enhancements 

that require additional analysis. The Department does not have a formal structure 

to capture and track these issues identified in their model risk assessment 

document.
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INDEPENDENT AUDITORS’ REPORT (Continued)

The Department also made a number of technical model revisions to address 

findings identified by the Government Accountability Office in FY2016, but 

corrective actions for certain other issues, including income imputation for IDR 

loans, are still in process. 

They also initiated other corrective actions that have not yet been completed,

including the development of policies and procedures for model development, 

operation and validation, and performance of an independent validation of the 

Student Loan Model. These remaining issues could impact the reliability of the 

subsidy estimates used for financial reporting, budgetary formulation and 

management analysis.

Department and Federal Student Aid Management Need to Mitigate Persistent 

Information Technology Control Deficiencies

The Department oversees a large portfolio of Department-owned and contractorowned business systems and applications that requires an effective and

comprehensive information system security program. Prior audits have identified 

numerous control deficiencies at the Department, Federal Student Aid (FSA), and

application level. This year, the Department made substantial progress in 

completing entity-wide information security policies and procedures and addressing 

general application control deficiencies for the Department’s core financial 

management system. However, we continued to identify control deficiencies in the 

Department’s information security program relating to personnel management and 

compliance monitoring. We also found configuration management weaknesses in

the Department’s general network and core financial management system.

Furthermore, we continued to identify general control deficiencies in FSA’s financial 

applications. These deficiencies increase the risk of unauthorized access to the 

Department’s systems used to capture, process, and report financial transactions 

and balances, affecting the reliability and security of its data and information.

Compliance

As part of obtaining reasonable assurance about whether the Department’s financial statements 

are free from material misstatement, we performed tests of its compliance with certain provisions 

of laws, regulations, contracts, and grant agreements consistent with our professional 

responsibilities discussed below.

The results of our tests, exclusive of those discussed in the second paragraph below, disclosed 

one instance of noncompliance, described below and in Exhibit B, which is required to be reported 

in accordance with Government Auditing Standards and OMB Bulletin 17-03.

As of September 30, 2017, FSA is not in compliance with the legal requirement for 

referring 120 day delinquent student loan debts to Treasury. In 2014, Federal law1

was amended2 to require agencies to notify the Secretary of the Treasury of valid, 

delinquent nontax debts that are over 120 days delinquent – 60 days earlier than 

 

1 31 U.S. Code Section 3716(c)(6) 2 Public Law 113-101 (DATA Act) Section 5
84 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

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INDEPENDENT AUDITORS’ REPORT (Continued)

the previous 180 days requirement – for the purpose of administrative offset (i.e. 

collection through the reduction of future Federal payments). Due to the number of 

entities and systems involved in handling student loan debts, FSA is not yet capable 

of meeting this accelerated timeline.

We also performed tests of compliance with certain provisions of the Federal Financial 

Management Improvement Act (FFMIA). However, providing an opinion on compliance with 

FFMIA was not an objective of our audit, and accordingly, we do not express such an opinion. 

The results of our tests of these provisions disclosed no instances in which the Department’s 

financial management systems did not substantially comply with (1) Federal financial 

management systems requirements, (2) applicable Federal accounting standards, or (3) the 

USSGL at the transaction level. 

Management’s Responsibility for Internal Control and Compliance

Management is responsible for (1) evaluating the effectiveness of internal control over financial 

reporting based on criteria established under the Federal Managers’ Financial Integrity Act 

(FMFIA), (2) providing a statement of assurance on the overall effectiveness on internal control 

over financial reporting, (3) ensuring the Department’s financial management systems are in 

substantial compliance with FFMIA requirements, and (4) complying with other applicable laws, 

regulations, contracts, and grant agreements. 

Auditors’ Responsibilities

We are responsible for: (1) obtaining a sufficient understanding of internal control over financial 

reporting to plan the audit, (2) testing whether the Department’s financial management systems 

substantially comply with the FFMIA requirements referred to above, and (3) testing compliance 

with certain provisions of laws, regulations, contracts and grant agreements.

We did not evaluate all internal controls relevant to operating objectives as broadly established 

by the FMFIA, such as those controls relevant to preparing statistical reports and ensuring 

efficient operations. We limited our internal control testing to testing controls over financial 

reporting. Because of inherent limitations in internal control, misstatements due to error or fraud, 

losses or noncompliance may nevertheless occur and not be detected. We also caution that 

projecting our audit results to future periods is subject to risk that controls may become inadequate 

because of changes in conditions or that the degree of compliance with controls may deteriorate. 

In addition, we caution that our internal control testing may not be sufficient for other purposes.

We did not test compliance with all laws, regulations, contracts and grant agreements applicable 

to the Department. We limited our tests to certain provisions of laws, regulations, contracts and 

grant agreements noncompliance with which could have a direct effect on the determination of 

material financial statement amounts and disclosures. However, providing an opinion on 

compliance with those provisions was not an objective of our audit, and accordingly, we do not 

express such an opinion. We caution that noncompliance may occur and not be detected by these 

tests and that such testing may not be sufficient for other purposes. Also, our work on FFMIA 

would not necessarily disclose all instances of noncompliance with FFMIA requirements.
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

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85

INDEPENDENT AUDITORS’ REPORT (Continued)

Management’s Response to Findings 

Management’s response to the findings identified in our report is presented in Exhibit C. We did 

not audit the Department’s response and, accordingly, we express no opinion on it.

Status of Prior Year’s Control Deficiency and Noncompliance Issue

We have reviewed the status of the Department’s corrective actions with respect to the findings 

included in the prior year’s Independent Auditors’ Report, dated November 14, 2016. The status 

of prior year findings is presented in Exhibit D.

Purpose of the Report on Internal Control over Financial Reporting and on Compliance

The purpose of the Report on Internal Control over Financial Reporting and on Compliance is 

solely to describe the scope of our testing of internal control and compliance and the result of that 

testing, and not to provide an opinion on the effectiveness of the Department’s internal control or 

on compliance. These reports are an integral part of an audit performed in accordance with 

Government Auditing Standards in considering the Department’s internal control and compliance. 

Accordingly, these reports are not suitable for any other purpose.

CliftonLarsonAllen LLP

Arlington, Virginia

November 13, 2017
86 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | REPORT OF INDEPENDENT AUDITORS

INDEPENDENT AUDITORS’ REPORT (Continued)

EXHIBIT A

Significant Deficiencies

Controls over the Department’s Modeling Activities Need Improvement

The Department does not have a fully developed framework for model risk management and 

governance, or fully developed internal controls over its critical modeling activities, including 

model development, risk assessment, operation, and validation.

The Cost Estimation and Analysis Division (CEAD), a component of the Department’s Office of 

Planning, Evaluation and Policy Development, is responsible for developing estimates of the 

subsidy cost of the Department’s direct and guaranteed loan programs. These estimates are used 

to support budget estimates, policy decisions and financial reporting. CEAD has developed a set 

of complex financial and economic models that apply mathematical techniques and statistical 

methods to historical loan level data to develop student loan program performance assumptions 

and estimate the value and cost of the Department’s various loan programs. These models also 

support management’s estimate of the net present value of cash flows related to nearly $1.4

trillion in direct, defaulted, and guaranteed student loans as of September 30, 2017.

An effective control structure is generally defined through appropriately documented, approved,

and implemented policies and procedures that outline requirements for ensuring all modeling and 

related control activities are performed and documented in accordance with the intent of 

management. A proper governance structure involves input from program management and 

multiple layers of review, approval, and oversight from CEAD management, the Department and 

FSA Offices of the Chief Financial Officer, and senior agency management over modeling 

activities. Our audit identified the following:

Model development

The Department does not have a formalized process for managing critical model development 

and configuration management activities, which should include authorization; defining the 

objectives, applicable program attributes, and requirements affecting the planned model;

evaluation of available data; proposed design and potential design alternatives; and model 

testing, approval, and implementation.

Our FY2016 audit found the Department maintained limited documentation supporting the initial 

design, evaluation, justification and testing of the models for:

• selecting a sample of borrowers from the National Student Loan Data System (NSLDS) 

used for calculating program performance assumptions

• estimating future incomes for borrowers under income-dependent repayment plans

• projecting future cash flows for borrowers under income-dependent repayment plans

• calculating specific performance assumptions

• projecting overall program level cash flows (Student Loan Model)

During FY2016, CEAD updated its model for recoveries on defaulted loans and enhanced 

documentation related to the NSLDS sampling process. In FY2017, CEAD updated their model 

for prepayments and loan forgiveness due to death, disability, and bankruptcy, and have begun 

efforts to update their model for defaults. CEAD also implemented a number of enhancements to 

their income-driven repayment (IDR) model in response to deficiencies identified in a FY2016 

GAO report. These included incorporating inflation factors to income forecasts, adjusting grouping 

factors for imputed borrower incomes to reduce income volatility, and modifying the IDR 

participation allocation rates related to parent PLUS loans, which are not eligible for IDR. Their
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INDEPENDENT AUDITORS’ REPORT (Continued)

EXHIBIT A

Significant Deficiencies

documentation for these modifications represented a significant improvement in discussing the

methodology and their basis. However, the documentation was not sufficiently detailed to serve 

as a fully effective guide for an independent reviewer to follow the procedures performed.

The Department performs data quality reviews of its primary data source used in its modeling 

activities (the National Student Loan Data System or NSLDS). However, the Department does 

not have a structured process to document its evaluation of whether the reviews sufficiently

address the specific data used within its models, or independently determine the appropriateness

or reliability of the data used by their models. The Department also does not have a structured 

process for implementing, controlling and securing the various versions of the models maintained.

CEAD has begun discussing these actions with the Department’s reconstituted modeling 

oversight group, the Credit Reform Working Group (CRWG), in its monthly meetings, but does 

not document their model development plan, testing plans and approval of testing results before 

changes are implemented.

CEAD is comprised of a small team of experienced economists and analysts responsible for 

performing its modeling activities, and thoroughly documenting such design requirements, 

development processes, and testing evaluation is onerous for the current team. The Department 

has obtained additional contract support to assist with these efforts, but did not approve an 

additional specialist position for CEAD. Given the size, growth and changes of the Direct Loan

Program in recent years, ineffective controls over the design of new models can significantly 

impact the reliability of their estimates.

Model risk assessment 

CEAD maintains over 18 different economic and financial modeled assumptions used within the 

calculation of the Allowance for Subsidy for the Direct Loan Program and various other model 

assumptions for the FFEL and other Department programs. Some of the assumptions are updated 

annually, while others are updated biannually. The Department does not have a formalized

process for maintaining the Department’s model inventory, accumulating, assessing and 

documenting modeling risks, and monitoring the modification or development of its models. This 

risk assessment process should be independent of the agency-level risk assessment process 

performed in connection with the agency level management controls review process required by 

OMB Circular A-123, and should assist the CRWG in supporting the prioritization of model

development activities within the normal CEAD workload. In FY2017, the Department has initiated 

an independent, external validation review of its models. 

Model operation

The Department’s documentation of the control activities performed for operating approved 

models is not formalized. We identified deficiencies in the documentation of control activities over 

the Department’s model operations relating to data accumulation and validation, assumption 

development, and model execution. As a result, we could not verify the operating effectiveness 

of certain control activities, including various reviews and approvals. Although the Department 

completed technical documentation of the Student Loan Model (SLM) in FY2017, their 

documentation of policies and procedures remains incomplete.
88 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | REPORT OF INDEPENDENT AUDITORS

INDEPENDENT AUDITORS’ REPORT (Continued)

EXHIBIT A

Significant Deficiencies

Model validation

Model validation refers to the initial and ongoing review and approval of the design of the model 

and its ability to properly correlate historical data into estimated future program performance. The 

Department performs a number of critical procedures to monitor the performance of its models 

and validate the overall reasonableness of its outputs, including backcasts, cash flow analyses, 

and sensitivity analyses. However, these procedures are performed at the aggregate level and 

the Department does not evaluate the performance of specific cash flows, assumptions or 

individual models against established benchmarks using sound approaches and statistical 

measures of performance. We identified opportunities to enhance the usefulness of various

monthly accounting reports that are reviewed by the CRWG and could serve to identify unusual 

program activity or other potential modeling issues. 

The Department also does not have a process to comprehensively evaluate the results of these 

procedures and document their conclusion as to whether the models, in aggregate, continue to 

be adequate for forecasting the future performance of the student loan programs.

Governance

In FY2017, the Department formalized the roles and responsibilities of the CRWG, which includes 

various members of Department and FSA management, and serves as the first level monitoring 

structure over the Department’s modeling activities. Due to the current status of the Department’s 

enterprise risk management program, the CRWG has been unable to initiate efforts to integrate 

model risk issues with Department’s risk management program.

Summary

Without a fully effective risk management and control structure over its modeling activities, 

estimation errors or modeling risks may go undetected, increasing the potential for improper 

reporting and program decisions.

GAO’s Standards for Internal Controls in the Federal Government requires that agencies:

• design controls activities in response to objectives and risks

• define and delegate responsibilities

• document internal controls and “all transactions and other significant events”

• evaluate and document the results of ongoing monitoring evaluations to identify internal 

control issues

OMB Circular A-123, Management’s Responsibility for Enterprise Risk Management and Internal 

Control, updated in July 2016, requires agencies to take steps to integrate risk management into 

the internal controls over their business operations.

Industry specific guidance from federal regulators regarding model risk management, model

governance and related controls is also provided by the Federal Reserve and the Office of the

Comptroller of the Currency in Supervision and Regulation (SR) 11-7, Supervisory Guidance on 

Model Risk Management, and by the Federal Housing Finance Agency in their AB 2013-07 Model 

Risk Management Guidance.
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

REPORT OF INDEPENDENT AUDITORS | FINANCIAL SECTION

89

INDEPENDENT AUDITORS’ REPORT (Continued)

EXHIBIT A

Significant Deficiencies

Recommendations:

We recommend the Director, Budget Service:

1a. Develop and document the Department’s process, policies and procedures for the 

authorization, design, development, testing, approval and implementation of new models

and model enhancements.

1b. Document the Department’s process, policies, procedures and related controls for 

managing the operation and use of approved models.

1c. Enhance the process to capture model risks, update the assessment of risks related to 

each model, and document how that assessment impacts the Department’s prioritization 

of corrective actions, and requisite level of controls, validation and monitoring over each 

model.

1d. Document and enhance the Department’s processes, policies, procedures and related 

controls for the periodic review, validation and approval of the Department’s models at 

the assumption, model and program level.

1e. Document the overall review and conclusions drawn related to the evaluation of the 

results of model performance reviews and validation procedures performed.

1f. Ensure modeling risks are considered in connection with the Department’s enterprise 

risk management program.

Department and Federal Student Aid Management Need to Mitigate Persistent 

Information Technology Control Deficiencies

The Department oversees a large portfolio of Department-owned and contractor-owned business 

systems and applications that requires an effective and comprehensive information system 

security and privacy program. According to OMB Circular A-130, Managing Information as a 

Strategic Resource, key elements of an effective security program include 1) agency-wide and 

system-level policies and procedures; 2) properly designed, implemented and monitored 

information system controls to protect Department information and information systems from 

unauthorized access, use, disclosure, disruption, modification or destruction; and 3) cost effective

risk management.

Prior audits have identified numerous control deficiencies at the Department and application level. 

While the Department has made gradual progress to address these issues in recent years, we 

continued to identify certain control deficiencies in the Department’s information security program 

relating to compliance monitoring, personnel management, and management of various 

application level security, configuration management, and access controls. In addition, we 

continued to identify general application control deficiencies in FSA’s financially relevant 

applications.

Effective system security starts with strong governance, including agency level oversight, policies 

and procedures, entity-wide controls, and controls monitoring. We have reported for several years 

that the Department’s agency level information technology policies were outdated or did not fully 

address specific controls required by National Institute of Standards and Technology (NIST)

guidance. Designing and implementing effective agency level policies is the responsibility of the 

Department’s Chief Information Officer (CIO). This year the CIO substantially completed the 

guidance associated with the Department’s Information Assurance/Cybersecurity Policy.
90 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | REPORT OF INDEPENDENT AUDITORS

INDEPENDENT AUDITORS’ REPORT (Continued)

EXHIBIT A

Significant Deficiencies

Managing the information and system security program across the Department is primarily the 

responsibility of the Department’s Chief Information Security Officer (CISO), in conjunction with 

FSA’s CISO. The Department and FSA CISOs have enhanced their efforts to monitor the system 

security control activities over their agency systems in recent years and have initiated several 

multi-year corrective actions that should aid in addressing many of the long standing weaknesses 

that affect the Department and FSA systems. For example, the FSA CISO has implemented a 

security program based on continuous monitoring that includes regular updates to security 

documentation, routine security control assessments and vulnerability assessments, and risk 

analysis. The outcomes of these system security activities are reviewed and evaluated by the 

CISO in support of an ongoing authorization to operate. Monitoring of remediation activities 

associated with identified control deficiencies in FSA’s systems is fostered by regular update 

meetings held with management within the Technology Office and Business Operations, the 

Office of Inspector General (OIG) and the financial statement auditors. 

However, agency-level security controls also require the efforts of other offices across the 

Department, including the Office of Security, Facilities and Logistics Services. We continue to find 

a large number of Department employees and contractors with overdue reinvestigations, incorrect 

levels of background investigations for privileged users, and lack of investigation information. In 

addition, although the Department provided training for completing position designations using 

the Office of Personnel Management’s Position Designation Tool, the Department’s Office of 

Management has not ensured Department system owners completed position designations in 

order to determine and document suitability and investigation requirements for each system’s 

roles/responsibilities. Furthermore, the Department CISO has been working with Contracting on 

language for service level agreements (SLAs) for contractor employee clearance monitoring as 

recommended in FY 2015, however the SLAs have not yet been implemented.

The Department’s agency-level information security controls are required to be evaluated 

annually by the OIG, in accordance with the Federal Information Security Modernization Act 

(FISMA). The FY 2016 OIG review involved testing financial and non-financial systems’ controls

and identified control deficiencies in five of eight reporting areas related to configuration 

management, information security continuous monitoring, incident response, identity and access 

management, and security and privacy training.

Although FSA implemented a governance structure for managing agency-level system security 

risk, the tactical execution of remediating system level control weaknesses and ensuring 

compliance with information security requirements still needs improvement.

Managing system security controls at the application or system level is the responsibility of the 

system owners, in conjunction with system level information system security officers (ISSOs).

Since last year, FSA added additional ISSOs and an ISSO supervisor; however, our audit

continued to identify application, or system, specific control deficiencies in the areas of security 

management, access controls, configuration management, and contingency planning in one or 

more of the five financial systems we tested this year. We continued to identify configuration 

management issues with the Department’s general support system, but noted substantial 

improvement in the remediation of information security control weaknesses for the Department’s

core financial management system.

At FSA, we tested four systems and our audit continued to identify control deficiencies in security 

management, access controls, configuration management, and contingency planning across 
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

REPORT OF INDEPENDENT AUDITORS | FINANCIAL SECTION

91

INDEPENDENT AUDITORS’ REPORT (Continued)

EXHIBIT A

Significant Deficiencies

these systems. The agency expected to implement a new system for user access management 

to address various access control deficiencies this year, but this system was not completed.

Specifically, we identified system specific issues in the following areas:

Security management

• Plans of Action and Milestones (POA&Ms) were not updated with the 

results from security control assessments or vulnerability assessments

for two FSA systems, and POA&Ms were not updated on a quarterly 

basis for four FSA systems

• Role based security training for users with significant system security 

responsibilities was not always completed for one FSA system tested

• Interconnection agreements were not detailed in System Security Plans 

and/or were not current for one FSA system

• Background reinvestigations were not tracked adequately or completed 

timely; and inappropriate levels of investigations were completed for 

numerous Department and FSA employees and contractor users

• Position designations were not finalized for Department employees and 

contractors

• Evidence to validate Department assets were returned for separated

Department employees was not always provided

Access controls

• User access for one FSA system was not always approved for all roles 

granted 

• Termination of system access for separated employees and contractors 

was not always completed timely for three FSA systems

• Inactive accounts were not always disabled for one FSA system

• User access for three FSA systems was not always recertified and some 

user accounts that were recertified had either never used the system, or 

had not logged in for an extended period of time 

Configuration management

• System configuration settings were not always compliant with 

Department policy for one FSA system

• Computer security configurations were inadequate and software was not 

patched or was unsupported for two Department systems

Contingency Planning

• Contingency plan tests were not conducted annually for one FSA system

The combination of agency-level and system specific deficiencies can increase the risk of 

unauthorized access to the Department and FSA’s systems used to capture, process, and report 

financial transactions and balances, affecting the reliability and security of the data and 

information. These findings are discussed in further detail below, and in a Limited Distribution 

Report to be provided to the Department and FSA management.
92 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | REPORT OF INDEPENDENT AUDITORS

INDEPENDENT AUDITORS’ REPORT (Continued)

EXHIBIT A

Significant Deficiencies

Security management

An organization–wide information security program sets the framework for addressing risk 

through developing and implementing effective information security procedures, monitoring the 

effectiveness of those procedures, providing appropriate security training and remediating control 

weaknesses through the POA&M process. Security policies and procedures also include 

employee hiring, transfer and termination practices.

Overall, we found improvement in the level of compliance with security awareness training 

requirements this year. For one FSA system, we found system users with significant system 

security responsibilities had not always completed role based training.

In addition, documentation was not provided to validate that Department assets were returned 

and access was disabled timely for one of 25 separated employees tested. In addition evidence 

was not provided to validate that Personal Identity Verification cards were returned for the entire

population of 25 separated employees tested. Furthermore, we noted issues with regard to 

background investigations, including numerous individuals with overdue investigations, privileged 

users with an incorrect level of investigation based on their system access and job function, and 

privileged users without documented background investigation status.

Access Controls

Access controls limit or detect inappropriate access to systems, protecting the data within them 

from unauthorized modification, loss or disclosure. Standards require that entities use a properly 

executed Memorandum of Understanding (MOU) to document the terms and conditions for 

sharing data and information resources in a secure method. An Interconnection Security 

Agreement (ISA) identifies the technical and security requirements for establishing, operating, 

and maintaining the interconnection. Consistent with previous years, for one system, we identified 

expired MOUs, and instances in which interconnections were not detailed in the corresponding 

System Security Plan.

User authorization refers to the documentation of the granting of user access to only the elements 

of a system the user needs to perform his or her duties. To be an effective control, user access 

should be documented, approved and periodically reviewed. Accounts for users should be 

terminated when the user no longer needs access to the system. Based on our work, we found:

• Accounts for terminated FSA, and loan servicer employees were not disabled for three

of the four FSA systems tested

• Inactive accounts were not disabled for one FSA system 

• For one FSA system, one from a sample of 25 new users did not have evidence that all 

user roles were approved

• User access for three systems was not always recertified, and some user 

accounts that were recertified for one system had either never used the system,

or had not logged in for an extended period of time 

Configuration Management

Configuration management ensures changes to systems are tested and approved, and systems 

are configured securely in accordance with policy. In our audit, we found one FSA system with 

configuration settings that did not adhere to Department policy. Furthermore, our testing identified 

insecure configurations, as well as unpatched and unsupported software for two systems.
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

REPORT OF INDEPENDENT AUDITORS | FINANCIAL SECTION

93

INDEPENDENT AUDITORS’ REPORT (Continued)

EXHIBIT A

Significant Deficiencies

Contingency Planning

Contingency plan tests were not conducted annually for one FSA system.

Information Security Program

The OIG performs an independent evaluation of the Department’s information technology security 

program and practices, as required by the Federal Information Security Modernization Act of 2014 

(FISMA). The 2017 FISMA evaluation identified findings in all seven areas reviewed: (1) Risk

Management, (2) Configuration Management, (3) Identity and Access Management (4) Security 

Training, (5) Information Security Continuous Monitoring, (6) Incident Response, and (7) 

Contingency Planning. The report made 37 recommendations (4 of which were repeat 

recommendations) to assist the Department and FSA with increasing the effectiveness of their 

information security program.

According to NIST SP 800-39, Managing Information Security Risk - Organization, Mission, and 

Information System View, the information system owner, in coordination with the information 

system security officer, is responsible for ensuring compliance with information security 

requirements.

The information system security officer is an individual responsible for ensuring that the

appropriate operational security posture is maintained for an information system and as such, 

works in close collaboration with the information system owner. The information system security 

officer also serves as a principal advisor on all matters, technical and otherwise, involving the 

security of an information system. The information system security officer has the detailed 

knowledge and expertise required to manage the security aspects of an information system and, 

in many organizations, is assigned responsibility for the day-to-day security operations of a 

system. 

OMB Circular A-130, Managing Information as a Strategic Resource, July 28, 2016, Appendix 1 

states agencies are to:

• Implement policies and procedures to ensure that all personnel are held 

accountable for complying with agency-wide information security and privacy 

requirements and policies.

• Implement security and privacy controls, and verify that they are operating as 

intended, and continuously monitored and assessed; put procedures in place so 

that security and privacy controls remain effective over time, and that steps are 

taken to maintain risk at an acceptable level within organizational risk tolerance.

• Correct deficiencies that are identified through information security and privacy 

assessments, information system continuous monitoring and privacy continuous 

monitoring programs, or internal or external audits and reviews, to include OMB 

reviews.

In order to appropriately manage risk from an organization-wide structure, the Department and 

FSA CISOs need to hold accountable those individuals responsible for ensuring that persistent 

IT control deficiencies are remediated and the appropriate security posture is maintained for 

Department and FSA information systems.
94 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | REPORT OF INDEPENDENT AUDITORS

INDEPENDENT AUDITORS’ REPORT (Continued)

EXHIBIT A

Significant Deficiencies

Recommendations:

We recommend the Principal Deputy Assistant Secretary, Office of Management:

2a. Implement a monitoring process over the personnel security activities to ensure 

investigations and reinvestigations are prioritized for personnel with sensitive system

access within the Department.

We recommend the Department CISO work with the FSA CISO to:

2b. Strengthen and refine the process for holding system owners and information system 

security officers accountable for remediation of control deficiencies and ensuring that the 

appropriate security posture is maintained for Department and FSA information systems.
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

REPORT OF INDEPENDENT AUDITORS | FINANCIAL SECTION

95

INDEPENDENT AUDITORS’ REPORT (Continued)

EXHIBIT B

Instance of Noncompliance

Requirement for Referring Delinquent Student Loan Debts to Treasury

In 2014, Federal law3 was amended4 to require agencies to notify the Secretary of the Treasury 

of valid, delinquent nontax debts that are over 120 days delinquent – 60 days earlier than the 

previous 180 days requirement – for the purpose of administrative offset (i.e. collection through 

the reduction of future Federal payments). Due to the number of entities and systems involved in 

handling student loan debts, FSA is not yet capable of meeting this accelerated timeline.

Accordingly, as of September 30, 2017, the Department and FSA are not in compliance with the 

legal requirement for referring 120 day delinquent student loan debts to Treasury.

To meet this requirement, the Department obtained legal clarification of how certain specific 

requirements of the amended law apply to the Direct Loan Program and other Department 

programs, improve delinquent debt reporting procedures, increase the frequency of some debt 

referrals and modify its defaulted loan management system to accommodate this change. The 

Department is also evaluating the impact of defining defaulted loans earlier on schools’

performance reporting and has developed a long-term project plan to incorporate the new referral 

requirements into various servicer contracts and guaranty agency agreements, so they can initiate

the required system programming changes. FSA is also working with the Department in

evaluating certain options for other requirements needed to achieve compliance.

Recommendation:

We recommend that the Secretary of Education work with the Federal Student Aid Chief 

Operating Officer to:

3. Continue to execute the corrective actions as outlined in FSA’s project plan to comply 

with the timing requirement for the referral of delinquent non-tax debts.

 

3 31 U.S. Code Section 3716(c)(6) 4 Public Law 113-101 (DATA Act) Section 5
96 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | REPORT OF INDEPENDENT AUDITORS

United States Department of Education

Washington, DC 20202

NOV 09 2017

MEMORANDUM

TO: Kathleen S. Tighe

Inspector General

FROM: Tim Soltis

Delegated the Duties of Chief Financial Officer

Jason Gray

Chief Information Officer

SUBJECT: DRAFT INDEPENDENT AUDITORS’ REPORT

Fiscal years 2017 and 2016 Financial Statements

U.S. Department of Education

ED-OIG/A17R0001

Please convey the Department’s sincere thanks to everyone on your staff who worked diligently on this financial 

statement audit. We extend our appreciation for the professionalism and commitment by all parties, including the 

Office of the Inspector general and CliftonLarsonAllen, throughout the audit process.

We have reviewed, and concur and agree with, the draft Independent Auditors’ Report. We are pleased to have 

received an unmodified “clean” audit opinion with no material weaknesses. The Department takes the two significant 

deficiencies reported, in the areas of controls over modeling activities and information technology controls, very 

seriously and we are dedicated to resolving the issues identified. We will share the final results with responsible senior 

officials, other interested program managers, and staff who will begin preparing corrective action plans to be used in the 

resolution process.

Again, please convey our appreciation to everyone on your staff whose efforts permitted the Department to complete 

the audit within the established timeframe.

Please contact Gary Wood, Director, Financial Management Operations, at (202) 245-8118 with any questions or 

comments.

INDEPENDENT AUDITORS’ REPORT (Continued)

EXHIBIT C

Management’s Response
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

REPORT OF INDEPENDENT AUDITORS | FINANCIAL SECTION

97

INDEPENDENT AUDITORS’ REPORT (Continued)

EXHIBIT D

Status of Prior Year Recommendations

Our assessment of the current status of the recommendations related to findings identified in the 

prior year audit is presented below:

Fiscal Year 2016 Recommendations Fiscal Year 2017 Status

CLA Recommended that the Deputy Secretary:

1a. Perform a comprehensive evaluation of the impact of the 

Department’s modeling on the Department’s mission in 

connection with the development of its enterprise risk 

management program.

Modified Repeat, see 

Significant Deficiency

CLA Recommended the Department Chief Financial 

Officer, in conjunction with the Director, Budget Service:

1b. Document the Department’s process, policies and 

procedures for the design, development, testing and 

authorization of new models. 

Modified Repeat, see 

Significant Deficiency

1c. Compile an inventory of the Department’s models, and 

regularly document management’s assessment of risks 

related to each model and how that assessment impacts the 

Department’s level of controls, validation and monitoring 

over each model. 

Modified Repeat, see 

Significant Deficiency

1d. Document the Department’s process, policies, 

procedures and related controls for the periodic review, 

validation and approval of the Department’s models at the 

model and program level.

Modified Repeat, see 

Significant Deficiency

1e. Document the overall review and conclusions drawn 

related to the evaluation of the results of model performance 

reviews and validation procedures performed.

Modified Repeat, see 

Significant Deficiency

CLA Recommended the Director, Budget Service and the 

Department and FSA Chief Financial Officers:

1f. Document the Department’s process, policies, procedures 

and related controls for managing the operation and use of 

approved models.

Modified Repeat, see 

Significant Deficiency

1g. Design, document and implement a modeling 

governance structure that specifically and separately 

addresses the roles and responsibilities for the oversight of 

critical modeling activities, including model risk assessment, 

model development, model operation, and model validation 

activities, as well as defining standards for policies, 

procedures and internal controls for these activities.

Modified Repeat, see 

Significant Deficiency

CLA Recommended the Department Chief Financial 

Officer:

1h. Ensure the agency’s management controls program fully 

evaluates the Department’s modeling activities 

commensurate with the materiality of the impact of the 

process to the agency’s reporting activities. 

Modified Repeat, see 

Significant Deficiency
98 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

FINANCIAL SECTION | REPORT OF INDEPENDENT AUDITORS

INDEPENDENT AUDITORS’ REPORT (Continued)

EXHIBIT D

Status of Prior Year Recommendations

CLA Recommended the Department CIO: 

2a. Ensure the update, review, approval and dissemination 

of the Information Assurance/ Cybersecurity Policy and 

associated guidance is completed in order to comply with 

NIST standards and OMB guidance. 

Closed

2b. Design and implement controls over the handling of 

Department security and privacy incidents to ensure their 

resolution is properly documented.

Modified Repeat, see 

Significant Deficiency

CLA Recommended the Principal Deputy Assistant 

Secretary, Office of Management:

2c. Implement a monitoring process over the personnel 

security activities to ensure investigations and 

reinvestigations are prioritized for personnel with sensitive 

system access within the Department. 

Modified Repeat, see 

Significant Deficiency

CLA Recommended the Department CISO work with the 

FSA CISO to:

2d. Strengthen and refine the process for holding system 

owners and information system security officers accountable 

for remediation of control deficiencies and ensuring that the 

appropriate security posture is maintained for Department 

and FSA information systems.

Modified Repeat, see 

Significant Deficiency

Noncompliance with Laws and Regulations

3. CLA recommended that the Secretary of Education work 

with the Federal Student Aid Chief Operating Officer to

continue to execute the corrective actions as outlined in 

FSA’s project plan to comply with the timing requirement for 

the referral of delinquent non-tax debts.

Repeat