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

FORWARD-LOOKING INFORMATION

This section summarizes information pertinent to the 

Department’s future progress and success.

DIRECT LOAN PROGRAM

The Department’s largest program, the William D. 

Ford Federal Direct Loan (Direct Loan) program, 

provides students and their families with funds to 

help pay for their postsecondary education costs. Easing 

the burden of student loan debt is a significant priority 

for the Department. The following is a discussion of 

(1) the steps the Department has taken to ensure that 

student debt is manageable and (2) the risks inherent in 

estimating the cost of the program.

Managing Student Loan Debt

Each year, federal student loans help millions of 

Americans obtain a college education—an investment 

that, on average, has high returns. While the average 

return to a college degree remains high, substantial 

inequities in outcomes exist, and some students leave 

school poorly equipped to manage their debt, whether 

due to limited labor market opportunities or high debt.

Traditionally, federal loans of this type have had flat 

10-year repayment schedules, making it difficult for 

borrowers to pay at the start of their career when their 

salaries are lower. The recent expansion of income-driven 

repayment plans grants students the opportunity for 

greater financial flexibility as it pertains to their monthly 

payment. For more details on these plans, visit FSA’s 

How to Repay Your Loans Portal.

As the labor market declined during the financial crisis 

of 2008, serious challenges in student debt repayment 

came to the forefront of conversations. The availability 

of income-driven repayment plans like Pay As You 

Earn (PAYE) and an improving labor market has led to 

substantial improvement, signifying Departmental progress 

in the focus area of higher education, namely, its efforts to 

innovate loan program guidelines in order to make student 

loan debt more manageable for borrowers across the board. 

Recent trends in student loan repayment data show that:

 More than 80 percent of Direct Loan recipients with 

loans in repayment are current on their loans.

 Growing numbers of borrowers are taking action and 

responsibility with regard to their student loans when 

they are in need of modifications and support. As of 

June 2017, nearly 6.3 million Direct Loan recipients 

were enrolled in income-driven repayment plans, 

representing a 19 percent increase from June 2016 

and a 62 percent increase from June 2015.

The Department has made progress in this area and 

continues to work relentlessly to make student debt more 

manageable. Looking to the future, the Department will 

build on its recent successes by:

 Conducting significant outreach efforts to inform 

student loan borrowers of their repayment options, 

including the protections provided by income-driven 

repayment plans.

 Ensuring that borrowers have access to an affordable 

repayment plan, high-quality customer service, 

reliable information, and fair treatment.

 Continuing to support additional tools like the College 

Scorecard and Financial Aid Shopping Sheet to increase 

transparency around higher education costs and 

outcomes, in an effort to help students and families 

make informed decisions before college enrollment.

Managing Risks and Uncertainty Facing 

the Direct Loan Program’s Cost Estimates

Direct Loan program costs are estimated consistent with 

the requirements of the Federal Credit Reform Act of 1990. 

Under the Act, the future costs and revenues associated 

with a loan are estimated for the entire life of the loan, up 

to 40 years in this case. The actual performance of a loan 

cohort tends to deviate from the estimated performance 

during that time, which is not unexpected given the 

inherent uncertainty involved in developing estimates. 

There are four types of risk that make estimating lifetime 

program costs a difficult task.

Legislative, Regulatory, and Policy Risk

There are inherent risks from the possibility that the cost 

structure of the Direct Loan program may be altered 

through legislative, regulatory, or administrative action. 

In addition, recent legislative, regulatory, and policy 
FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

11

action may be difficult to interpret with regard to effects 

on financial modeling and estimation, given the lack of 

actual trend data availability. Some examples of current 

risks include the following:

Income-Driven Repayment Plans: Several new incomedriven repayment plans have been introduced in recent 

years, including Income-Based Repayment, PAYE, and 

Revised Pay As You Earn. In general, the proliferation 

of plans has made income-driven repayment terms 

more generous (and more costly to the government) 

and made the plans available to a greater number of 

borrowers. Having more plans complicates repayment 

plan selection, since the tradeoffs between available plans 

vary by borrower and may not always be entirely clear. 

Selected comparisons between projected originations and 

borrower repayments under the different income-driven 

repayment plans are available on the Department’s 

website. The Department has also engaged in outreach 

campaigns to broaden borrower awareness of these plans. 

However, future commitment to market and increased 

participation in these plans are areas of uncertainty.

Public Service Loan Forgiveness: Enacted in 2007, the 

Public Service Loan Forgiveness (PSLF) program allows 

a Direct student loan borrower to have the balance of 

their Direct student loans forgiven after having made 

120 qualifying monthly payments under a qualifying 

repayment plan, while working full time for a qualifying 

public service employer (such as government or certain 

types of nonprofit organizations). In general, forgiveness 

provided via PSLF raises the cost of the Direct Loan 

program; however, there is still uncertainty as to how 

many borrowers will take advantage of the program. 

Much of this uncertainty arises because borrowers do not 

need to apply for the program until after having made the 

120 qualifying monthly payments. While data on current 

applications is helpful to gauge potential forgiveness, it 

may not be representative of final participation figures. In 

addition, since the first date by which a borrower could 

receive forgiveness under this program is October 1, 

2017, the Department does not yet have a robust set of 

actual forgiveness data. The available data on borrowers 

who have already certified their employment, nearly 

740,000 borrowers as of September 2017, is less valuable 

than it appears since it does not track breaks in their 

repayment or qualifying employment. The Department 

continues to remain informed on, and manage the risk 

that may arise in relation to, the uncertainty about 

the effect of further borrower outreach on boosting 

participation in the PSLF program.

Borrower Defense: In May 2015, Corinthian Colleges, 

Inc. (Corinthian), a publicly traded company operating 

numerous postsecondary schools that enrolled over 

70,000 students at more than 100 campuses nationwide, 

filed for bankruptcy under deteriorating financial 

conditions and while subject to multiple state and federal 

investigations. The Department received thousands of 

claims for student loan relief from Corinthian students 

under a provision in the Higher Education Act of 1965

(HEA) referred to as “borrower defense.” Valid borrower 

defense claims would lead to the discharge of borrower 

debt, thus increasing the cost of the Direct Loan 

program to taxpayers. However, it is unknown how 

many of the claims are valid. Since Corinthian, several 

other postsecondary schools have closed under similar 

circumstances, including ITT Technical Institute.

In August 2015, the Department initiated a rulemaking 

process to establish a more accessible and consistent 

borrower defense standard to clarify and streamline 

the borrower defense process to protect borrowers. The 

legality of this rule has since been challenged in court 

(California Association of Private Postsecondary Schools 

v. DeVos) and certain provisions of the rule have been 

subsequently delayed. In addition, the Department 

has initiated a new rulemaking process to consider 

potential changes to the original rule. The overall level 

of activity that could lead to valid borrower defense 

claims, particularly in the for-profit postsecondary sector, 

coupled with the uncertainty as to the framework of the 

final rule, make projections as to the financial impact 

exceedingly difficult. The Department continues to 

monitor instances of this risk factor to its programs.

Estimation Risk

Actual student loan outcomes may deviate from estimated 

student loan outcomes, which is not unexpected given 

the long projection window of up to 40 years. The Direct 

Loan program is subject to a large number of future 

borrower level events and economic factors that heavily 

impact the ultimate cost of issued loans. For example, 

estimates that need to be made for loans originating in 

FY 2017 include how long students will remain in school; 

what repayment plan will be chosen; whether the loan will 

be consolidated; whether the borrower will die, become 

disabled, bankrupt, or have another claim for discharge or 

forgiveness (closed school, borrower defense, etc.); if the 

loan will go into deferment or forbearance; if the loan will 

go into default and, if so, what collections will be received 

on the defaulted loan; and, if the loan is in income-driven 

repayment, what the borrower’s employment (public 

sector or not) and income and family status will be over 
12 FY 2017 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

the next 25 years. These types of projections are not only 

extremely difficult to make but also are subject to change 

if future student behaviors deviate from past experience. 

Changes in private student loan markets, such as the 

recent increase in refinancing of federal student loans 

into private student loans, also add a layer of uncertainty 

to student loan estimates. Lastly, the Direct student loan 

portfolio has grown from around $380 billion in FY 2011 

to around $1.06 trillion as of the end of FY 2017. This 

growth naturally results in increased re-estimates, since a 

re-estimate worth 1 percent of the portfolio today would 

be more than twice as large as a similar re-estimate in FY 

2011 ($10.6 billion vs. $3.8 billion).

Macroeconomic Risk

The ultimate amount, timing and value of future 

borrower repayments under the Direct Loan program are 

heavily affected by certain economic factors, especially 

since the introduction of income-based repayment plans. 

Some examples include the following:

Interest Rates: Direct Loan subsidy estimates are very 

sensitive to changes in interest rates. Recent interest rate 

history has been atypical, as interest rates have continued 

to remain lower than their historical averages. Under the 

current program terms, the fixed borrower rates for direct 

loans are established in advance of the upcoming school 

year, while the Treasury fixed interest rate on borrowings 

to fund those loans is not set until after those awards are 

fully disbursed, which can be as much as 18 months later. 

Unexpected changes in interest rates during this time can 

significantly impact the subsidy cost of these loans.

Unemployment: The financial crisis of 2008 and ensuing 

spike in unemployment rates had a dramatic effect on 

both student loan volume and student loan performance. 

Student loan volume peaked along with unemployment, 

as many displaced workers sought higher education 

opportunities. Student loan performance suffered as 

many borrowers repaying their loans were left with much 

less disposable income with which to make their loan 

payments. For example, the default rate for students was 

at a high of 14.7 percent for loans entering repayment 

in 2010, while the most recent rate is 11.5 percent for 

loans entering repayment in 2014. While recessions and 

economic downturns are cyclical phenomena, their exact 

timing and impact on the cost estimates remain an area 

of uncertainty.

Wage Growth: The estimated costs of income-driven 

repayment plans are largely dependent on trends in 

observed wage growth. To the extent that future wage 

growth deviates significantly from prior wage growth, 

actual costs of income-driven repayment plans may 

deviate from projected estimated costs. The Department 

continues to manage risks in this area by continuing to 

learn about its borrower base and remain informed on 

such labor market statistics.

Operational Risk

Unforeseen issues in administering and servicing student 

loans may impact the cost estimates. For example, in 

March 2017, a tool used to automatically transfer a 

family’s tax information to both student aid applications 

and income-driven repayment (IDR) plan applications 

was taken down due to security concerns. Although usage 

of the tool for IDR recertification has since been brought 

back up, it is yet uncertain what, if any, impact this outage 

may have had on student loan cost estimates. However, 

this example highlights that there is an inherent risk that 

future, unpredictable disruptions in the administrative 

status quo may impact student loan cost estimates.

CONTINUOUS IMPROVEMENT

Improving critical infrastructure, systems, and overall 

capacity, and ensuring sound strategic decision making 

regarding allocation of resources are essential to the 

Department’s future progress and success. Exploring 

the expanded use of shared services and incorporating 

enterprise risk management into Department decision 

making are two of the Department’s key initiatives.

Shared Services

The Department of Education uses shared services where 

feasible and practical, including payroll and travel. The 

Department will explore other options to further leverage 

shared services for other mission support areas in the 

coming years.

Enterprise Risk Management

The Department plans to implement Enterprise Risk 

Management (ERM) practices by integrating its existing 

risk management processes and governance bodies into a 

suitable ERM framework and including risk as a central 

element in all critical day-to-day and strategic decisionmaking activities. The Department will also develop a more 

risk-aware culture that facilitates increased focus on the 

wide range of risks the Department faces and fosters more 

open discussions about how those risks might impact the 

accomplishment of the Department’s mission and whether 

allocation of resources is aligned to best mitigate risks to 

an acceptable level. The Senior Management Council will 

oversee the implementation of ERM in accordance with 

OMB Circular A-123, Management’s Responsibility for 

Enterprise Risk Management and Internal Control.