MANAGEMENT’S DISCUSSION AND ANALYSIS 

20 FY 2016 Agency Financial Report—U.S. Department of Education 

Financial Highlights 

Introduction 

This section provides summarized information and analyses about the Department’s assets, 

liabilities, net position, sources and uses of funds, program costs, and related trend data. It also 

provides a high-level perspective of the detailed information contained in the financial 

statements and related notes. 

The Department consistently produces complete, accurate, and timely financial information. The 

Department’s financial statements and notes are prepared in accordance with accounting 

principles generally accepted in the United States for federal agencies issued by the Federal 

Accounting Standards Advisory Board and the format and content specified by OMB Circular 

No. A-136, Financial Reporting Requirements. The financial statements, notes, and underlying 

business processes, systems, and controls are audited by an independent accounting firm with 

audit oversight provided by the Office of Inspector General (OIG). For 15 consecutive years, the 

Department has earned an unmodified (or “clean”) audit opinion. The financial statements and 

notes for FY 2016 are on pages 46–83 and the Independent Auditors’ Report begins on 

page 92. 

Balance Sheet 

The consolidated balance sheet presents, as of a specific point in time (the end of the fiscal 

year), the Department’s total assets, total liabilities, and net position. 

The Department’s assets totaled 

$1,174.8 billion as of September 30, 

2016. The vast majority of the assets 

relate to credit program receivables, 

which comprised 91.6 percent of all 

assets. Direct loans comprise the largest 

share of these receivables, totaling 

$958.9 billion. All other assets totaled 

$98.2 billion, most of which was Fund 

Balance with Treasury.

The Department’s liabilities totaled 

$1,142.0 billion as of September 30, 

2016. As with assets, the vast majority of 

the Department’s liabilities are associated 

with credit programs, primarily amounts 

borrowed from the U.S. Department of 

the Treasury (Treasury) to fund student 

loans. This debt totaled $1,127.8 billion 

as of September 30, 2016. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

FY 2016 Agency Financial Report—U.S. Department of Education 21

The chart to the left shows the changes in 

the Direct Loan receivables components 

over the past five years. The principal 

continues to grow as the Direct Loan 

program has originated all new federal 

loans since July 2010. However, the rate of 

increase in principal has slowed, as the 

Direct Loan program has originated fewer 

new loans each year since FY 2012 as a 

result of stagnant and in some cases 

declining enrollment, coinciding with the 

recovery from the 2007–09 recession. 

Even so, new loan disbursements continue 

to exceed overall loan principal 

repayments—student loan borrowers now 

have more options to stretch out their 

repayment terms and reduce their monthly 

payments. 

The positive allowance for subsidy 

represents an estimate of funds expected 

to be recovered in excess of principal 

loaned less anticipated defaults, loan 

cancellations, and other adjustments. This positive allowance for subsidy results primarily from 

the difference between the interest rates charged by the Department to borrowers and the 

interest rates charged to the Department on amounts borrowed from Treasury to make the 

loans. The reduction in the allowance since FY 2013 is due primarily to higher subsidy costs, 

the main cause being high participation in income-driven repayment plans. Participation in 

income-driven repayment plans has increased as (a) new plans have become available that are 

more advantageous to borrowers, (b) new plans have become available that expand the 

potential pool of borrowers, and (c) the Department has conducted targeted outreach to 

borrowers to make them aware of their potential eligibility for these plans. 

The table on the right shows the 

payment status of the Direct Loan 

principal and interest balances 

outstanding. The Current 

Repayment category consists of 

loans that are being paid back on 

time, including the current portion 

of loans refinanced pursuant to 

income-driven repayment plans. 

The Payments Temporarily 

Postponed category includes 

payments that have been 

temporarily suspended due to 

circumstances such as current 

enrollment in school, grace 

periods, and financial hardships. 

 Current Repayment $188.5 $247.2 $332.0 $406.8

 Payments Temporarily Postponed $336.0 $379.6 $387.3 $396.1

 Delinquent $47.8 $54.6 $65.1 $71.8

 Default/Bankruptcy/Other $41.5 $49.8 $60.7 $78.9

 Total Dollar Amount of Direct Loans Outstanding $613.8 $731.2 $845.1 $953.6

Total No. of Direct Loan Recipients (in Millions) 25.6 27.9 29.9 31.5

Loan Status

FISCAL YEAR

2013 2014 2015 2016

Payment Status of Direct Loan Principal and Interest Balances

(Dollars in Billions)
MANAGEMENT’S DISCUSSION AND ANALYSIS 

22 FY 2016 Agency Financial Report—U.S. Department of Education 

Loans in the Delinquent category 

are considered in “repayment”

status, but payments are anywhere 

from 31 to 360 days late. 

Default/Bankruptcy/Other includes 

loans that are over 360 days 

delinquent (default status); loans in 

a nondefaulted bankruptcy status; 

and loans in disability status. The 

percentage of loans in default 

continues to grow, even as 

delinquencies and new defaults 

have declined, because defaulted 

loans can be difficult to collect on or 

rehabilitate. The percentage of the portfolio in current repayment, which rose from 31 percent in

FY 2013 to 43 percent in FY 2016, has eclipsed payments temporarily postponed and has 

grown far faster than loans in default. This trend coincides with an improving economy and 

matches what has been seen in other areas of commercial lending. 

The Department borrows funds to disburse new loans and pay credit program outlays and 

related costs. The Department repays Treasury after consideration of cash position and the 

liability for future cash outflows as mandated by the Federal Credit Reform Act of 1990 (FCRA). 

The chart to the above right shows the Direct Loan program cumulative borrowing and 

repayment activity that resulted in the debt amount on the balance sheet. A diagram depicting 

the Direct Loan program financing process is displayed with related trend data on page 23 of 

this report. 

Statement of Net Cost 

The consolidated statement of net cost reports the Department’s components of the net costs of 

operations for a given fiscal year. Net cost of operations consists of the gross cost incurred less 

any exchange (i.e., earned) revenue from activities. Gross cost is composed of the cost of credit 

and grant programs, and operating costs. Exchange revenues are primarily interest earned on 

credit program loans. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

FY 2016 Agency Financial Report—U.S. Department of Education 23
MANAGEMENT’S DISCUSSION AND ANALYSIS 

24 FY 2016 Agency Financial Report—U.S. Department of Education 

Analysis of Direct Loan Program Subsidy Expense 

One of the components significantly impacting the Department’s gross costs pertains to the 

estimated subsidy expense of the Direct Loan program. The Department’s gross costs can 

fluctuate significantly each year as a result of changes in the estimated subsidy expense. 

Subsidy expense is an estimate of the cost of providing direct loans, but excludes the 

administrative costs of issuing and servicing the loans. The Department estimates subsidy 

expense using economic models that project cash flows on a net present value basis. 

The Department estimates subsidy costs annually for new loans disbursed in the current year; 

updates the previous cost estimates for outstanding loans disbursed in prior years (subsidy 

re-estimates); and updates previous cost estimates based on changes to terms of existing loans 

(subsidy modifications). The following chart shows these three components of the Direct Loan 

program subsidy expense for the past five years. 

Factors such as interest rates charged to the borrower, interest rates on Treasury debt, default 

rates, fees, and other costs impact the estimated cost calculation and determine whether the 

overall subsidy expense is positive or negative. Subsidy expense for new loans disbursed in the 

current year have been negative in recent years primarily because lending interest rates 

charged were greater than the historically low rates at which the Department borrowed from 

Treasury. In practical terms, a negative subsidy occurs when the interest and/or fees charged to 

the borrower are more than sufficient to cover the interest on Treasury borrowings and the costs 

of borrower default. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

FY 2016 Agency Financial Report—U.S. Department of Education 25

The costs of the Direct Loan program are highly sensitive to changes in actual and forecasted 

interest rates. For example, in FY 2016, a 1 percent increase in projected borrower interest 

rates would reduce projected Direct Loan subsidy cost by $4.8 billion. 

Policy changes to student loan terms and changes in default rates also significantly affect the 

Direct Loan program subsidy expense. For example, the Department modified the repayment 

plans available to Direct Loan borrowers in FY 2015. The PAYE loan repayment option 

available to eligible borrowers caps monthly payments for many recent graduates at an amount 

that is affordable based on their income. PAYE, first announced in October 2011, caps 

payments for direct loans at 10 percent of discretionary income for eligible borrowers. Borrowers 

formerly ineligible for the more generous PAYE repayment plan are now eligible for a modified 

version of PAYE that changed income-based repayment amounts on qualified loans from 

15 percent of discretionary income to 10 percent. This modification increased subsidy expense 

that resulted from lower expected loan repayments. 

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 income-driven repayment plan was the primary cost driver 

for that assumption. 

Analysis of Net Cost by Program 

As required by the GPRA Modernization Act of 2010, each of the Department’s reporting groups 

and major program offices have been aligned with the strategic goals presented in the 

Department’s FY 2014–18 Strategic Plan. As further described in the performance section of the 

Management’s Discussion & Analysis, Strategic Plan Goals 1–5 are sharply defined directives 

that guide the Department’s program offices to carry out the vision and programmatic mission; 

the net cost programs can be specifically associated with these five strategic goals. The 

Department also has a cross-cutting Strategic Plan Goal 6, U.S. Department of Education 

Capacity, which focuses on improving the organizational capacities of the Department to 

implement the Strategic Plan. As a result, the Department does not assign specific programs to 

Strategic Plan Goal 6 for presentation in the statement of net cost. 

Net Cost Program Program Office Strategic Goal

Program A: 

Increase College 

Access, Quality, and 

Completion 

Federal Student Aid 

Office of Postsecondary 

Education 

Office of Career, Technical, 

and Adult Education 

Goal 1: Postsecondary Education, Career and 

Technical Education, and Adult Education. 

Increase college access, affordability, quality, and 

completion by improving postsecondary education 

and lifelong learning opportunities for youths and 

adults. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

26 FY 2016 Agency Financial Report—U.S. Department of Education 

Net Cost Program Program Office Strategic Goal

Program B:

Improve Preparation for 

College and Career 

from Birth Through 12th 

Grade, Especially for 

Children with High 

Needs

Office of Elementary and 

Secondary Education

Goal 2: Elementary and Secondary Education.

Improve the elementary and secondary education 

system’s ability to consistently deliver excellent 

instruction aligned with rigorous academic standards 

while providing effective support services to close 

achievement and opportunity gaps, and ensure all 

students graduate high school college- and careerready.

Goal 3: Early Learning.

Improve the health, social-emotional, and cognitive 

outcomes for all children from birth through 3rd 

grade, so that all children, particularly those with high 

needs, are on track for graduating from high school 

college- and career-ready.

Program C: 

Ensure Effective 

Educational 

Opportunities for All 

Students 

Office of English Language 

Acquisition 

Office for Civil Rights 

Office of Special Education 

and Rehabilitative Services 

Goal 4: Equity. 

Increase educational opportunities for underserved 

students and reduce discrimination so that all 

students are well-positioned to succeed. 

Program D: 

Enhance the Education 

System’s Ability to 

Continuously Improve 

Institute of Education Sciences 

Office of Innovation and 

Improvement 

Goal 5: Continuous Improvement of the U.S. 

Education System. 

Enhance the education system’s ability to 

continuously improve through better and more 

widespread use of data, research and evaluation, 

evidence, transparency, innovation, and technology. 

The Department has more than 100 grant and loan programs 

(www.ed.gov/programs/inventory.html). In the statement of net cost, they have been mapped to 

the applicable strategic goals. The Department’s FY 2016 expenditures for grant programs 

totaled over $75 billion. The three largest grant programs are Title I, Pell, and the Individuals 

with Disabilities Education Act grants. In addition to student loans and grants, the Department 

offers other discretionary grants under a variety of authorizing legislation, awarded using a 

competitive process and formula grants, using formulas determined by Congress with no 

application process. The following table presents a breakdown of net cost by program for 

FY 2016 and FY 2015. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

FY 2016 Agency Financial Report—U.S. Department of Education 27

The FY 2016 increase in net cost for Program A is primarily attributed to subsidy loan expenses. 

FY 2016 Direct Loan program and FFEL program subsidy expense increased by $17 billion and 

$14 billion, respectively, from FY 2015 subsidy expense amounts. 

Statement of Changes in Net Position 

The consolidated statement of changes in net position reports the beginning net position, the 

summary effect of transactions that affect net position during the fiscal year, and the ending net 

position. Net position consists of unexpended appropriations and cumulative results of 

operations. Unexpended appropriations include undelivered orders and unobligated balances 

for grant and administrative operations. Cumulative results of operations represent the net 

difference since inception between (1) expenses and (2) revenues and financing sources. Net 

position of the Department totaled $32.8 billion for the period ended September 30, 2016. This 

reflects a 40 percent decrease over the net position of $54.8 billion from the prior fiscal year. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

28 FY 2016 Agency Financial Report—U.S. Department of Education 

Statement of Budgetary Resources 

The combined statement of budgetary resources presents information on how budgetary 

resources were made available and their status at the end of the fiscal year. Information in this 

statement is reported on the budgetary basis of accounting as prescribed by OMB and 

Treasury. 

The Department’s budgetary 

resources totaled $335.0 billion for 

the period ended September 30, 

2016, decreasing from 

$349.7 billion, or approximately 

4.2 percent from the prior year. 

Budgetary resources are comprised 

of appropriated budgetary 

resources of $103.2 billion and 

non-budgetary credit reform 

resources of $231.8 billion. The 

non-budgetary credit reform 

resources are predominantly 

borrowing authority for the loan 

programs. 

Gross outlays of the 

Department totaled 

$285.2 billion for the 

period ended 

September 30, 2016, 

and consisted of 

appropriated budgetary 

resources of 

$88.4 billion and 

non-budgetary credit 

program funding of 

$196.8 billion. Gross 

outlays are primarily 

comprised of credit 

program loan 

disbursements and 

claim payments, credit 

program subsidy interest payments to Treasury, and grant payments. Additional information on 

the Department’s sources and uses of funds is shown in the schedule of spending on page 133. 

This schedule includes sections titled, “What Money Is Available to Spend,” “How Was the 

Money Spent,” and “Who Did the Money Go To.”
MANAGEMENT’S DISCUSSION AND ANALYSIS 

FY 2016 Agency Financial Report—U.S. Department of Education 29

Limitations of the Financial Statements 

Management has prepared the accompanying financial statements to report the financial 

position and operational results for the U.S. Department of Education for FY 2016 and FY 2015, 

pursuant to the requirements of Title 31 of the United States Code, section 3515(b). 

While these statements have been prepared from the books and records of the Department in 

accordance with generally accepted accounting principles for federal entities and the formats 

prescribed by OMB, these statements are in addition to the financial reports used to monitor and 

control budgetary resources, which are prepared from the same books and records. 

The statements should be read with the realization that they are a component of the U.S. 

government, a sovereign entity. The implications of this are that the liabilities presented herein 

cannot be liquidated without the enactment of appropriations, and that ongoing operations are 

subject to the enactment of future appropriations.