OTHER INFORMATION

FY 2016 Agency Financial Report—U.S. Department of Education 115

Improper Payments Reporting Details 

OMB Circular A-123, Appendix C, Requirements for Effective Estimation and Remediation 

of Improper Payments, implements the provisions of the Improper Payments Information 

Act of 2002, as amended by the Improper Payments Elimination and Recovery Act of 2010

(IPERA), and the Improper Payments Elimination and Recovery Improvement Act of 2012

(IPERIA), and directs federal agencies to review and assess all programs and activities 

they administer and identify those determined to be susceptible to significant improper 

payments. Significant improper payments are defined as those in any particular program 

that exceed both 1.5 percent of program payments and $10 million annually, or that exceed 

$100 million. 

The Department determined that the Pell Grant and Direct Loan programs were susceptible 

to significant improper payments risk based on the OMB Circular A-123, Appendix C, 

definition. The Department also determined these two programs were susceptible to 

improper payments risk based on the last risk assessments performed in FY 2014, as 

described in the Risk Assessment subsection. In FY 2016, the Pell Grant and Direct Loan 

programs continued to be susceptible to significant improper payments. Furthermore, the 

Pell Grant and Direct Loan programs were designated by OMB as high-priority programs in 

2011 and 2015, respectively. The Department continues to address the requirements to 

comply with reporting on the Pell Grant and Direct Loan programs as risk susceptible and 

high-priority programs. Details on improper payment estimates and reduction targets for 

both programs are included within the Improper Payment Reporting subsection. 

As described in the Analysis of Systems, Controls, and Legal Compliance section, despite a 

robust internal controls framework, including controls intended to estimate, prevent, detect, 

and recover improper payments, the OIG reported that the Department was not compliant 

with IPERA because the FY 2015 improper payment rate did not meet the annual reduction 

target for the Direct Loan program. The full report, including the Department’s response, is 

available for review at the OIG website. The Department convened a workgroup with OIG 

and OMB participation to evaluate and recommend improvements to the FY 2016 

estimation methodology, and develop proposed corrective actions in response to the 

FY 2015 IPERA Compliance Audit Report. The outcome of the workgroup included 

revisions to the FY 2016 estimation methodology to address the findings, and to make 

additional enhancements to the methodology as described in the Improper Payment 

Sampling and Estimation Methodology subsection. 

Programs Description 

Pell Grant 

The Pell Grant program, authorized under Title IV of the Higher Education Act of 1965 

(HEA), provides need-based grants to low-income undergraduate and certain 

postbaccalaureate students to promote access to postsecondary education. 

Direct Loan 

The Direct Loan program, added to 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. 
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116 FY 2016 Agency Financial Report—U.S. Department of Education 

Title I 

The Title I program, authorized by the Elementary and Secondary Education Act of 1965,

as amended by the No Child Left Behind Act of 2002 and the Every Student Succeeds Act 

of 2015, ensures that all children have a fair, equal, and significant opportunity to obtain a 

high-quality education and reach, at a minimum, proficiency on challenging state academic 

achievement standards and state academic assessments. 

Risk Assessment 

As required by OMB A-123, Appendix C, the Department assesses the risk of improper 

payments at least once every three years for each program that is not already reporting an 

improper payments estimate. Detailed information on the risk assessment process and 

results is included within this subsection. A summary of the assessment is presented in the 

Risk Assessment Results table below. 

Risk Assessment Results 

Program

Last Risk 

Assessment 

RiskSusceptible? 

Federal Student Aid-Managed Programs 

Federal Pell Grant FY 2014 Yes

The Teacher Education Assistance for College and Higher 

Education Grant FY 2014 No

Federal Supplemental Educational Opportunity Grant FY 2014 No

Iraq and Afghanistan Service Grant FY 2014 No

Federal Perkins Loan Program FY 2014 No

Federal Direct Loan Program FY 2014 Yes

Federal Family Education Loan Program FY 2014 No

Federal Work-Study Program FY 2014 No

Health Education Assistance Loan Program FY 2015 No

Other Department Programs

Title I FY 2016 No

Other Grant Programs FY 2016 No

Contract Payments FY 2016 No

Administrative Payments FY 2014 No

Federal Student Aid-Managed Programs 

During FY 2014, a risk assessment was performed on all Federal Student Aid (FSA)-

managed programs, with the exception of the Health Education Assistance Loan (HEAL) 

program. The HEAL program was transferred from the U.S. Department of Health and 

Human Services to FSA on July 1, 2014, and a risk assessment was subsequently 

performed in FY 2015. 
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FY 2016 Agency Financial Report—U.S. Department of Education 117 

For all FSA-managed programs, risk assessment meetings were held with program owners, 

key personnel, and other designees to discuss the inherent risk of improper payments 

according to the following 10 risk factors: 

 Newness of Program or Transactions; 

 Complexity of Program or Transactions; 

 Volume of Payments; 

 Level of Manual Intervention; 

 Changes in Program Funding Authorities, Practices, and Procedures; 

 History of Audit Issues; 

 Prior Improper Payments Reporting Results; 

 Human Capital Management; 

 Nature of Program Recipients; and 

 Management Oversight. 

Process owners assigned a rating to each risk factor based on their detailed understanding 

of the programs and risk of improper payments. Weighted percentages were assigned to 

each risk factor rating based on a judgmental determination of the direct or indirect impact 

on improper payments. An overall risk score was then computed for each program, 

calculated by the sum of the weighted scores for each risk factor and overall rating scale. 

Based on risk assessments conducted in FY 2014 and FY 2015, the Department 

determined that the Pell Grant and Direct Loan programs were susceptible to risk of 

significant improper payments. 

According to OMB Circular A-123, Appendix C, if a program has previously been identified 

as susceptible to improper payments, but has documented at least two consecutive years 

of improper payments that are below the IPERA threshold, the agency may request relief 

from the annual reporting requirement for this program. The Federal Family Education Loan 

(FFEL) program reported improper payment estimates below the statutory threshold during 

FY 2013 and FY 2014. On August 4, 2015, OMB approved the Department’s request, with

OIG’s concurrence, for relief from improper payments reporting for the FFEL program. 

Accordingly, the Department has formally reclassified the FFEL program as not susceptible 

to significant improper payments. 

In FY 2016, it was confirmed that there were no significant changes in legislation and/or 

increases in funding necessitating reassessment of programs’ risk susceptibility. As a 

result, risk assessments for FSA-managed programs will next be performed in FY 2017. 

Other Department Programs 

In 2014, the Department completed a risk assessment on administrative payments to 

employees in accordance with IPERIA. These payments were inclusive of FSA. The areas 

of administrative payments that were examined include: Salary/Locality Pay, Travel, 

Purchase Cards, and Transit Benefits. The analysis included a review of actual recaptured 

payments versus total outlay for each of the related payment areas and the likelihood of 

payment errors. The Department determined that administrative payments to employees 
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118 FY 2016 Agency Financial Report—U.S. Department of Education 

were not susceptible to significant improper payments. Administrative payments risk 

assessment will next be performed in FY 2017. 

The Department conducted a risk assessment of contract payments in FY 2013. During 

FY 2016, the Department reassessed the risk of improper payments on contract payments, 

including contracts managed by FSA, as required by OMB Circular A-123, Appendix C. 

Given robust internal controls, the Department continues to experience an extremely low 

volume of improper payments in contracts; as such, the assessment found contract 

payments are not susceptible to significant improper payments. 

The Department conducted risk assessments of all non-FSA managed grant programs in 

FY 2013. During FY 2016, the Department reassessed the risk of improper payments on all 

non-FSA-managed grant programs. While there is inherent risk that grant recipients may 

fail to adequately document expenditures or expend funds on unallowable activities, the 

FY 2016 assessments determined that none of the other grant programs were susceptible 

to significant improper payments. The analysis included a quantitative review of questioned 

costs from Single Audit findings versus total program expenditures, as well as a qualitative 

review of other risk factors including changes in legislation or regulations and history of 

audit findings. The list of all programs assessed in FY 2016 can be located here. 

The non-FSA grant programs assessed in FY 2016 include Title I, which was not found to 

be susceptible to significant improper payments. During FY 2016, the Department 

requested relief, with OIG’s concurrence, from reporting Title I estimates on improper 

payments since it demonstrated that the program had more than two consecutive years of 

improper payments reporting below the IPERA thresholds. OMB approved the 

Department’s request on March 4, 2016, with the caveat that a risk assessment be 

conducted in both FY 2016 and FY 2017 to ensure that the enactment of the Every Student 

Succeeds Act has not caused the Title I program to become susceptible to significant 

improper payments. Given the Department’s plan and timeline for implementing the Every 

Student Succeeds Act, the Department did not find the new legislation to increase the risk 

of improper payments for Title I in FY 2016 to a significant level. 

Sampling and Estimation Methodology

On September 17, 2014, the Department obtained approval from OMB to use an alternative 

methodology for estimating improper payments for the Pell Grant and Direct Loan 

programs. The alternative methodology leverages data collected through FSA Program 

Reviews, which include procedures such as determining whether schools properly 

performed verification of students’ self-reported income, identifying conflicting applicant 

data, student academic performance, and eligibility on the disbursed funds for a sample of 

students in each review. The alternative methodology, although it does not use statistical 

sampling techniques, provides for a more efficient allocation of resources by integrating 

the estimation methodology into core FSA monitoring functions. The Department 

determined that it would be too costly and inefficient, and significantly increase the 

burden on schools and students, to develop a rigorous statistical sampling methodology 

that would provide a very tight precision rate (such as providing no more than 0.1 percent 

over the established target as prescribed by OMB). The methodology, including updates to 

address findings from the OIG’s FY 2015 IPERA Compliance Audit Report, is described in 

detail on the Department’s improper payments website. 
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FY 2016 Agency Financial Report—U.S. Department of Education 119 

On June 30, 2016, the Department submitted updates to the alternative sampling plan and 

estimation methodology to OMB for approval in response to findings from the OIG’s 

FY 2015 IPERA Compliance Audit Report, U.S. Department of Education’s Compliance 

with Improper Payment Reporting Requirements for Fiscal Year 2015. In its report, OIG 

noted that the prior estimation methodology did not include all improper payments in the 

calculation of the estimates, such as improper payments resulting from recipients 

submitting inaccurate self-reported income on the Free Application for Federal Student Aid 

(FAFSA), all improper payments resulting from schools disbursing Pell Grant and Direct 

Loan funds to students enrolled in ineligible programs or students attending ineligible 

locations, and other improper payments not identified in Program Reviews. The OIG also 

noted that the prior estimation methodology was susceptible to volatility and potential 

inordinate impact of a single improper payment finding, and does not account for Program 

Reviews that do not reach the Program Review Report stage in time for inclusion in the 

estimated improper payment rates. The Department updated its methodology for FY 2016 

to address these findings and to make additional enhancements. These updates include: 

incorporation of misreported income over- and under-payment estimates from the 

FAFSA/IRS Data Statistical Study into the Pell Grant improper payment rate to address 

improper payments associated with inaccurate self-reported income on the FAFSA; 

inclusion of Pell Grant and Direct Loan funds improperly disbursed to students enrolled in 

ineligible programs or at ineligible locations within the Pell Grant and Direct Loan improper 

payment rates; and expansion of the population of Program Reviews eligible for review. 

OMB approved the Department’s updates to the alternative sampling plan and estimation 

methodology on October 14, 2016. 

The Department acknowledges that its alternative estimation methodology can lead to 

volatile improper payment estimates. Although the sample size has increased year-overyear, there continues to be variability in the improper payment estimates. This is largely due 

to fewer program reviews being conducted at lower-risk schools. This category of schools 

accounts for a large portion of the Direct Loan and Pell Grant program disbursements. As a 

result, the potential exists for student-level test results of a single observation (such as a 

single student or school) at lower-risk schools to significantly influence the improper 

payment estimates, resulting in volatility of the model.
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120 FY 2016 Agency Financial Report—U.S. Department of Education 

Improper Payment Reporting 

Table 1. Improper Payment Reduction Outlook 

(Dollars in Millions) 

Program 

or 

Activity 

PY Outlays (1)PY IP % (2)PY IP $ (2)CY Outlays (3)CY IP % (4)CY IP $ (4) CY Overpayment $ CY Underpayment $ CY + 1 Est. Outlays (5)CY + 1 Est. IP % (6)CY + 1 Est. IP $ CY + 2 Est. Outlays (5)CY + 2 Est. IP % (6)CY + 2 Est. IP $ CY + 3 Est. Outlays (5) CY + 3 Est. IP % (6)CY + 3 Est. IP $ 

Pell Grant 29,909.28 1.88 562.29 28,188.55 7.85 2,212.80 2,025.27 187.53 26,553 7.85 2,084.41 29,288 7.85 2,299.11 30,428 7.85 2,388.60 

Direct Loan 98,771.65 1.30 1,284.03 97,182.77 3.98 3,867.87 3,771.26 96.61 100,105 3.98 3,984.18 105,039 3.98 4,180.55 110,514 3.98 4,398.46 

Title I (7) 15,715.00 .127 19.95 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 

TOTAL (8) 144,395.93 1.29 1,866.27 125,371.32 4.85 6,080.67 5,796.53 284.14 126,658 4.79 6,068.59 134,327 4.82 6,479.66 140,942 4.82 6,787.06 

(1) The source of FY 2015 outlays for all programs is FSA’s Financial Management System (FMS) as presented in the FY 2015 AFR.

(2) The PY improper payment estimates reported in the table above reflect the improper payment estimates for FY 2015 as reported in the FY 2015 AFR. FSA has published 

recalculated FY 2015 improper payment rates in response to the FY 2015 IPERA Compliance Audit Report published by OIG on May 10, 2016. The updated improper payment rates 

are prepared in accordance with OMB-approved methodologies. The estimated improper payment rate and improper payment total for the Direct Loan program as recalculated are 

2.63% and $2,597.69 million, respectively. The estimated improper payment rate and improper payment total for the Pell Grant program as recalculated are 1.52% and $454.62 

million, respectively. These estimates are reported using the alternative sampling and estimation methodology approved as of October 20, 2015. 

(3) The source of FY 2016 outlays for all program amounts is FMS. 

(4) In FY 2016, the Pell Grant and Direct Loan program improper payment estimates are reported using the updated alternative sampling and estimation methodology approved by 

OMB on October 14, 2016. FY 2016 rates are based on program reviews performed in FYs 2014–16 for award year 2013–14 data. Under the updated methodology, two new 

sources were incorporated into the FY 2016 improper payment estimates, which impacted the estimates for both programs. For the Pell Grant program, incorporating improper 

payment estimates resulting from recipients submitting inaccurate self-reported income on the FAFSA impacted the estimate by approximately 1.34% while incorporating improper 

payment estimates resulting from schools disbursing funds to students enrolled in ineligible programs/locations impacted the estimate by approximately 0.13%. For the Direct Loan 

Program, incorporating improper payment estimates resulting from schools disbursing funds to students enrolled in ineligible programs/locations impacted the Direct Loan estimate 

by approximately 1.15%. 

(5) The source of FYs 2017–19 Pell Grant and Direct Loan outlay amounts is the FY 2017 President’s Budget at the Mid-Session Review. 

(6) The Department uses an OMB-approved alternative estimation methodology to estimate improper payments for the Pell Grant and Direct Loan programs. These estimates lack the 

precision of other estimates developed using random, statistical methodologies. As disclosed above, although the sample size has increased year over year, there continues to be 

both imprecision and variability in the improper payments estimates that limit management’s confidence in using these results to establish out-year reduction targets. Accordingly, 

out-year targets are set to the CY IP% until the methodology is stabilized and the precision and volatility constraints are addressed. In FY 2017, the Department will continue to work 

with relevant stakeholders to consider ways to increase precision and decrease volatility in future year methodologies and estimates. Increases in the improper payment rates over 

the prior year and failure to meet the targets can be attributed to changes to and the imprecision of the alternative methodology, as opposed to a control failure or increase in actual 

improper payments in the underlying programs. 

(7) Title I has historically been included in this table because it is a former Section 57 program and OMB A-11, dated 2002, Section 57, Exhibit 57B required agencies to report on 

programs deemed at risk for erroneous payments. However, in FY 2016, the Department requested relief, with OIG’s concurrence, from reporting Title I estimates on improper 

payments since it demonstrated that the program had more than two consecutive years of improper payments reporting below the IPERA thresholds. OMB approved the Department’s 

request on March 4, 2016, with the caveat that a risk assessment be conducted in FY 2016 and FY 2017 to ensure the enactment of the Every Student Succeeds Act has not caused 

the Title I program to become susceptible to significant improper payments. 

(8) The total of the estimates for the agency does not represent a true statistical estimate for the agency.
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FY 2016 Agency Financial Report—U.S. Department of Education 121 

High-Priority Programs 

In FY 2011, OMB designated the Pell Grant program a high-priority program, because 

estimated FY 2010 Pell Grant improper payments of $1,005 million exceeded the OMB 

FY 2010 high-priority program threshold of $750 million. Since then, the Department has 

worked with OMB to implement all applicable high-priority program requirements. On 

February 4, 2015, OMB also designated the Direct Loan program as a high-priority program 

as estimated improper payments of $1,532 million in FY 2014 exceeded the statutory 

$750 million threshold. 

Under the Executive Order 13520, agencies with high-priority programs shall establish annual 

or semiannual measurements or actions for reducing improper payments. The Department 

submitted supplemental measures for the Pell Grant and Direct Loan programs to OMB to be 

approved for FY 2015 reporting. OMB granted approval on October 3, 2015. 

The supplemental measure for the Pell Grant program is based on the total number of Pell 

Grant-eligible applicants who transferred tax data from the IRS to their FAFSA as a 

percentage of the total number of Pell Grant-eligible applicants who were determined to be 

eligible to use the Internal Revenue Service Data Retrieval Tool (IRS DRT) to transfer tax 

data. 

For the Direct Loan program, a similar supplemental measure is in place based on the total 

number of Direct Loan recipients who transferred tax data from the IRS to the FAFSA as a 

percentage of the total number of Direct Loan recipients who were determined to be eligible 

to use the IRS DRT to transfer tax data. 

The supplemental measures for the Pell Grant and Direct Loan programs focus on the higher 

risk area of misreported income by the student/parent on the FAFSA. Use of the IRS DRT to 

directly transfer tax information from IRS to the online FAFSA verifies applicants’ income, and 

as applicable their parents’ income, to determine how much aid they are eligible to receive. 

Errors in income on an application is one of the root causes of improper payments for both 

the Direct Loan and Pell Grant programs; transferring tax data to the FAFSA with the IRS 

DRT helps ensure that the income is more accurate and therefore reduces the likelihood of 

an improper payment being made. The Department continues to focus on efforts to increase 

the population of applicants eligible to use the IRS DRT as described in the Improper 

Payment Corrective Actions section below. 

The Pell Grant and Direct Loan supplemental measure rates for award year 2015–16 are 

61.99 and 59.26, respectively. The Pell Grant and Direct Loan supplemental measure targets 

for award year 2016–17 are also 61.99 and 59.26, respectively. The supplemental measures, 

current FY supplemental measure rates, and supplemental measure targets are reported 

annually on PaymentAccuracy.gov for both programs. 

On May 10, 2015, the Federal Student Aid PIN was replaced with FSA ID, improving the 

security and customer experience for the Department’s student- and borrower-based 

websites. Students, parents, and borrowers are required to use an FSA ID, made up of a 

username and password, to access certain Department websites and tools, including the IRS 

DRT. As a result of the transition, IRS DRT usage dropped from previous levels. IRS DRT 

usage is expected to remain at award year 2015–16 levels through award year 2016–17. 

FSA continues to work to ensure that the transition to the FSA ID is as seamless as possible 
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122 FY 2016 Agency Financial Report—U.S. Department of Education 

for its customers. The Department also continues to encourage students and parents to use 

the IRS DRT to import data from their tax return and not change it. It is the fastest, easiest, 

and most secure method of meeting income verification requirements. FSA has modified 

FAFSA on the Web to encourage all eligible applicants and parents to use the IRS DRT, 

including displaying new messages to explain the advantages to using the IRS DRT on the 

initial student and parent finances pages, and directing eligible applicants and parents who do 

not opt to link to the IRS from these pages to a new page that recommends IRS DRT use. 

Measures to Ensure Program Access 

FSA is committed to ensuring program access and providing federal student aid to all 

eligible students pursuing postsecondary education. The IRS DRT supports access to aid 

programs by allowing students to transfer tax data directly from the IRS to the online FAFSA 

and lessens the burden of income verification. We continue to offer additional application 

methods to individuals to ensure that applicants can take advantage of an application option 

that best suits their personal needs. Furthermore, improvements in the last few years to the 

FAFSA and IRS DRT have resulted in a decrease in the average time it takes a student to

complete the online FAFSA. 

On February 4, 2013, FSA’s Customer Experience group announced a partnership alliance 

between FSA and the IRS. The partnership focuses on reaching more individuals in low- to 

moderate-income communities with the goal of providing them with information, assistance, 

and access to relevant IRS and FSA services. The partnership is expected to contribute to 

increased awareness of FSA programs and create opportunities for increased access to the 

FAFSA.

Beginning with the 2013 tax year (the 2014–15 FAFSA Processing Year), the IRS has 

added a new, more efficient way that tax filers can request and receive Tax Return 

Transcripts. With the new IRS “Get Transcript Online” tool, the tax filer submits an online 

transcript request to the IRS and, if the request is authenticated, a second window displays 

the transcript in Portable Document Format. This new IRS tool potentially reduces the 

burden on FAFSA applicants who are requested to provide tax transcripts. 

In March 2014, the Department launched the FAFSA Completion Initiative, through which 

the Department is partnering with state student grant agencies to allow these agencies to

provide secondary schools, school districts, and certain designated entities with limited, yet

important, information on student progress in completing the FAFSA form. The initiative will 

enable state student grant agencies and their school and district partners to identify those 

students who have not filed a FAFSA form and better target counseling, filing help, and 

other resources to those students. 

Improper Payment Root Cause Categories 

Our analysis indicated that the underlying root cause of improper payments for the Pell 

Grant and Direct Loan programs in FY 2016 was failure to verify financial data and 

administrative or process errors made by other parties. The root causes were identified 

through improper payment testing and categorized using categories of error as defined in 

the October 2014 update to OMB Circular A-123, Appendix C (OMB Memorandum 

M-15-02). Specific root causes associated with the “Failure to Verify – Financial Data” 

category include, but are not limited to, ineligibility for a Pell Grant or Direct Loan and 
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FY 2016 Agency Financial Report—U.S. Department of Education 123 

incorrect self-reporting of an applicant’s income that leads to incorrect awards based on 

Expected Family Contribution. Specific root causes associated with the “Administrative or 

Process Errors Made by – Other Party” category include, but are not limited to, incorrect 

processing of student data by institutions during normal operations; student account data 

changes not applied or processed correctly; satisfactory academic progress not achieved; 

incorrectly calculated return records by institutions returning Title IV student aid funds; and 

processing errors at the servicer level. Table 2 below, Improper Payment Root Cause 

Category Matrix, summarizes the root cause categories for the Pell Grant and Direct Loan 

programs. 

Table 2. Improper Payment Root Cause Category Matrix 

(Dollars in Millions) 

Reason for Improper Payment

Direct Loan Pell Grant 

Overpayments Underpayments Over-payments Underpayments 

Program Design or Structural Issue 

Inability to Authenticate Eligibility

Failure to Verify: 

Death Data 

Financial Data $92.39 $0 $328.28 $24.41 

Excluded Party 

Data 

Prisoner Data 

Other Eligibility 

Data (explain)

Administrative 

or Process 

Error Made by: 

Federal Agency 

State or Local 

Agency 

Other Party 

(e.g., 

participating 

lender, health 

care provider, or 

any other 

organization 

administering 

federal dollars) 

$3,678.87 $96.61 $1,696.99 $163.12 

Medical Necessity 

Insufficient Documentation to Determine 

Other Reason (a) (explain) 

Other Reason (b) (explain) 

TOTAL $3,771.26 $96.61 $2,025.27 $187.53 

Improper Payment Corrective Actions 

This section presents the corrective actions for the Pell Grant and Direct Loan programs. 

The corrective actions presented below are recommendations to the schools for findings 

that resulted from FSA Program Reviews. The discussion below also includes other longterm corrective actions applicable to these programs, such as the IRS DRT and verification. 
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124 FY 2016 Agency Financial Report—U.S. Department of Education 

Corrective Actions – Root Cause Category: Failure to Verify Data 

Error Cause Corrective Actions Completion Timeline 

Failure to 

Verify 

Financial Data 

Final Program Review Determinations 

indicate the action(s) institutions are required 

to take in order to make the Title IV, HEA 

programs, or the recipients, whole for any 

funds that were improperly managed and to 

prevent the same problems from recurring. 

FSA continues to utilize and promote the IRS 

DRT, which enables Title IV student aid 

applicants and, as needed, parents of 

applicants, to transfer certain tax return 

information from an IRS website directly to

their online FAFSA. 

For the 2017–18 award year, applicants are 

able to complete their FAFSA using “priorprior year” tax data. For the 2017–2018 

FAFSA, students and families provide income 

information from calendar year 2015 and not 

from calendar year 2016. This is in contrast 

with the “prior year” process previously 

employed where many applicants submitted 

their FAFSAs before tax returns were 

completed, resulting in the need to estimate 

income and tax information that subsequently 

needed to be corrected once the tax return 

was filed; or worse, waited to complete their 

FAFSA until after the tax return had been 

filed. 

Additionally, FSA continues to enhance 

verification procedures and require selected 

schools to verify specific information reported 

on the FAFSA by student aid applicants. As 

with prior years’ verification selection, databased statistical analysis will continue to be 

used by the Department to select for 

verification the 2017–2018 FAFSA applicants 

with the highest statistical probability of error 

and the impact of such error on award 

amounts. 

Completion dates for 

findings identified via the 

Program Review process 

vary. Overall, FSA 

requires that all findings

identified during the FSA

Program Reviews are 

tracked through resolution 

via the Postsecondary

Education Participants

System (PEPS). This

corrective action process

is further described in the 

FY 2012 AFR. 

Promotion of the IRS 

DRT will continue in 

FY 2017 and beyond. 

On October 1, 2016, the 

2017–18 FAFSA became 

available, as opposed to 

January 1, 2017, with the 

ability to use “prior-prior 

year” tax data. Both of 

these changes will assist 

in preventing improper 

payments as it provides 

greater access to IRS 

DRT and there is more 

time for effective 

verification procedures. 

Enhancements to 

verification procedures is 

a continuous process that 

is reviewed each award 

year. 
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FY 2016 Agency Financial Report—U.S. Department of Education 125 

Corrective Actions – Root Cause Category: Administrative or Process Errors 

Error Cause Corrective Actions Completion Timeline 

Administrative 

or Process 

Errors by Other 

Party 

Final Program Review Determinations 

indicate the action(s) the institution is 

required to take in order to make the Title IV, 

HEA programs, or the recipients whole for 

any funds that were improperly managed and 

to prevent the same problems from recurring. 

Completion dates for 

findings identified via the 

Program Review process 

vary. Overall, FSA 

requires that all findings

identified during the FSA

Program Reviews are 

tracked through resolution 

via PEPS. This corrective 

action process is further

described in the FY 2012

AFR. 

Administrative 

or Process 

Errors by Other 

Party (Improper 

FFEL to Direct 

Loan 

Consolidations) 

FSA is coordinating with the respective Title 

IV Additional Servicers (TIVAS) and Not-ForProfit (NFP) servicers to develop and 

implement corrective action plans to address 

consolidation errors, such as funds returned 

due to duplicate funding or multiple Loan 

Verification Certificates (LVCs), inclusion of 

student loans that the borrower desired to 

exclude or were determined to be ineligible, 

and payoffs sent to the wrong address. FSA 

will work to reevaluate the current LVC 

processing procedures and will consider 

improvements in system edits to prevent the 

processing of duplicate LVCs and ineligible 

loans. Additionally, management will consider 

additional trainings on processing LVCs to 

ensure the correct account, lender, and loan 

information is processed in an effort to reduce 

the risk of potential improper payments. 

Improper payments

identified through testing 

of Direct Loan 

Consolidations for 

FY 2016 were remediated 

or are in the process of 

being remediated during 

FY 2017. 

Administrative 

or Process 

Errors by Other 

Party (Improper 

Direct Loan 

Refunds) 

FSA is coordinating with the respective 

TIVAS and NFP servicers to develop and 

implement corrective action plans to address 

refund errors, such as refunds made to 

ineligible lenders and borrowers, made for 

ineligible purposes, made in the incorrect 

amount, and/or sent to the incorrect payee. 

FSA will also consider additional trainings on 

refund processing to help ensure refunds are 

made in a manner consistent with FSA 

guidance. 

Improper payments

identified through testing 

of Direct Loan Refunds for 

FY 2016 were remediated 

or are in the process of 

being remediated during 

FY 2017. 

Additional Corrective actions are described in the FY 2012 AFR. These include actions the 

Department continues to take to prevent improper payments, such as activities to improve 
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126 FY 2016 Agency Financial Report—U.S. Department of Education 

institutional level administration of Title IV Aid through development and dissemination of 

information, resources, and tools to institutions. 

Going forward, FSA will expand the use of data analytics to identify anomalies, trends, and 

patterns in application and disbursement data to help identify potential risk factors that may 

inform risk-based decisions regarding program oversight. FSA will further collaborate with 

OIG to receive and analyze fraud referrals and to identify potential fraud indicators for 

suspicious student activity. FSA has established a fraud group and engaged contract 

support to review and act on OIG fraud referrals. The primary objective of initial activities 

includes the intake, analysis, and disposition of referrals. FSA uses this analysis to inform 

recommendations on data analytics and identify ways to improve controls. 

Internal Control Over Payments 

The Department developed robust internal controls to prevent, detect, and recover improper 

payments. In designing controls, the Department strives to strike the right balance between 

providing timely and accurate payments to grant recipients and students, while at the same 

time ensuring that the controls are not too costly and burdensome to fund recipients. 

Additionally, the Department must rely on controls established by fund recipients who make 

payments on behalf of the Department. These controls are outside of the Department’s 

operational authority and present higher risks, as evidenced by OIG work identifying 

instances of questioned costs and restitution payments along with the fact that the majority 

of the estimated improper payments in FY 2016 are attributed to root causes associated 

with these third parties. 

The Department’s controls over improper payments are an essential part of the 

Department’s internal control framework described in the Analysis of Systems, Controls, 

and Legal Compliance section. As described above, the Department uses an alternative 

methodology to estimate the improper payment rates for the Pell Grant and Direct Loan 

programs. The Department continues to assess and enhance its controls over student aid 

payments. For example, the Department routinely analyzes application and payment data 

and considers other factors, such as program reviews and audit reports, to inform control 

enhancements and to devise ways to further reduce the risk of improper payments. For any 

deficiencies identified, root causes are identified and corrective action plans established 

and tracked to resolution. 

Table 3 below summarizes FSA’s self-assessment on the status of its internal control over 

payments for these programs. 

Table 3. Status of Internal Controls 

Internal Control Standards Pell Grant Direct Loan 

Control Environment 4 4 

Risk Assessment 4 4 

Control Activities 3 3 

Information and Communication 3 3 

Monitoring 3 3 

Legend: 

4 = Sufficient controls are in place to prevent IPs 

3 = Controls are in place to prevent IPs but there is room for improvement 

2 = Minimal controls are in place to prevent IPs 

1 = Controls are not in place to prevent IPs 
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FY 2016 Agency Financial Report—U.S. Department of Education 127 

FSA leverages its OMB Circular A-123 Appendix A assessment to evaluate the design and 

operating effectiveness of controls intended to prevent and detect improper payments. FSA 

assesses these controls overall and by the internal control components identified below: 

 Control Environment. FSA has a robust entity-level controls framework that provides 

discipline and structure to help FSA achieve its objectives. Part of this framework is a 

governance structure that includes an Improper Payment Working Group, a body of 

accountable stakeholders that informs decisions related to improper payment 

requirements, estimation, and control. 

 Risk Assessment. FSA uses a risk assessment approach to target high-risk areas and 

focus resources. FSA’s Office of Program Compliance, School Eligibility Service Group 

performs annual risk assessments to inform decisions on where and how to target each 

year’s program reviews. As a function of its A-123 program, FSA performs annual risk 

assessment of business processes and systems, including Pell Grant and Direct Loan 

payment processes, to determine where to focus control testing. FSA performs a 

qualitative risk assessment at least once every three years to identify FSA programs 

susceptible to significant improper payments. 

 Control Activities. In FY 2016, FSA identified 328 controls related to improper 

payments prevention or detection through its A-123A assessment. As an example, FSA 

annually conducts approximately 250–300 Program Reviews of the approximately 

6,000 eligible schools to assess institutions’ compliance with Title IV regulations. 

 Information and Communication. FSA’s internal control framework supports quality 

information management and communication. FSA has an incident reporting process to 

collect information, such as high-dollar overpayment on a quarterly basis. FSA reports 

an estimate of the annual amount and rate of improper payments for all programs and 

activities susceptible to significant improper payments. In addition, FSA provides 

guidance to third parties through Federal Register notices, Dear Colleague Letters, and 

the Information for Financial Aid Professionals website, among others. 

 Monitoring. FSA has a set of activities to monitor program performance, identify 

instances of improper payments, and promptly resolve findings of audits and other 

reviews related to improper payments. As an example, upon completion of Program 

Reviews, FSA monitors appropriate corrective action and resolution of improper 

payments. 

As indicated above, the Department is committed to preventing improper payments with 

front-end controls, and detecting and recovering them if they occur. The Department 

continues efforts to: (1) assess the risk of improper payments, (2) estimate improper 

payments, (3) address root causes of improper payments, and (4) recover improper 

payments. 

Accountability 

FSA and other Department offices, managers, and staff are held accountable for meeting 

applicable improper payments reduction targets and for establishing and maintaining 

sufficient internal controls, including a control environment that prevents improper payments 

from being made, and promptly detects and recovers any improper payments that may 

occur. Offices and managers are held accountable through a variety of mechanisms and 

controls, including annual performance measures aligned to the strategic plan, 
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128 FY 2016 Agency Financial Report—U.S. Department of Education 

organizational performance review criteria, and individual annual performance appraisal 

criteria. 

Schools are responsible and held accountable for recipient verification for need-based aid. 

FSA certifies a school’s eligibility for participation in Title IV programs, conducts periodic 

Program Reviews of schools to verify compliance, and evaluates school financial statement 

and compliance audits to ensure any potential compliance issues or control weaknesses 

are resolved. Department and FSA contractors are held accountable through various 

contract management and oversight activities and functions, control assessments, and 

audits. 

Agency Information Systems and Other Infrastructure 

Audit Follow-up

The Department gathers and manages thousands of audits of grantees. Audit records are 

managed and maintained in an Audit Accountability and Resolution Tracking System for 

non-FSA-managed programs and an EZ Audit system for FSA-managed programs. Audits 

are a key risk management tool, and the Department has demonstrated great success 

working with grant recipients to resolve audit findings in a timely manner. Data from these 

audit systems are analyzed to determine trends in audit findings and resolution, allowing 

the Department to search for and better understand commonalities. This effort is assisting 

the Department in reducing improper payments by strengthening audit resolution and 

grants management. 

Barriers 

For FSA programs, the Department does not see significant barriers in taking corrective 

action in reducing improper payments. A detailed discussion of program-specific barriers 

can be found in the FY 2012 Report on the Department of Education’s Payment Recapture 

Audits. 

Recapture of Improper Payments Reporting 

Agencies are required to conduct recovery audits for contract payments and programs that 

expend $1 million or more annually if conducting such audits would be cost effective. The 

Department performed a cost-benefit analysis and determined that a payment recapture 

audit program would not be cost effective for FSA programs, other grant programs, and 

contracts. OMB was notified on October 30, 2014, that it was not cost effective to conduct a 

payment recapture audit and the programs/activities would be excluded from a payment 

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

2015. A comprehensive report on the cost effectiveness of the various recapture audit 

programs can be found in the Department’s FY 2012 Report on the Department of 

Education’s Payment Recapture Audits. 

The Department identifies and recovers improper payments through sources other than 

payment recapture audits. The Department works with grantees and Title IV (FSA) program 

participants to resolve and recover amounts identified in compliance audits, OIG audits, and 

Department-conducted program reviews as potential improper payments. Accounts 

receivable are established for amounts determined to be due to the Department and 
OTHER INFORMATION

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FY 2016 Agency Financial Report—U.S. Department of Education 129 

collection actions are pursued. Payments can also be collected through offsets and other 

means. Recipients of Department funds can appeal management’s decisions regarding

funds to be returned to the Department, thereby delaying or decreasing the amounts the 

Department is able to collect. 

In addition, for the Pell Grant program, recoveries also occur when overpayments to

students are assigned to FSA for collection. Pell Grant amounts recovered through student

debt collection were approximately $9.25 million in FY 2016, and $10.3 million in FY 2015. 

While all programs may have student debts transferred to debt collection, the categorization 

of resulting collections as an improper payment recovery is unique to the Pell Grant

program. Unlike loans, Pell Grant payments transferred to debt collection commonly indicate 

a potential improper payment at time of disbursement. 

The Department has not established formal recovery targets for contract payments given 

the consistently insignificant findings. Since FY 2004, the Department’s audits have found 

no improper payments for recovery, and there are no outstanding overpayments to report. 

Should future contract payments be identified for recovery, the Department will establish 

recovery targets, taking into consideration the nature of the overpayments and any potential 

barriers to recovering funds. 

Table 4, Improper Payment Recaptures without Audit Programs, below provides estimates of 

the amounts identified and recovered through Compliance Audits, OIG Audits, and Program 

Reviews for FY 2016. 

Table 4. Overpayment Recaptures without Recapture Audit Programs(1) 

(Dollars in Millions) 

Overpayments Recaptured outside of Payment Recapture Audits

Program or Activity(2) Amount 

Identified 

Amount 

Recaptured 

All Department programs (including FSA) 118.71 20.35 

TOTAL 118.71 20.35 

(1) The Department’s cost-benefit analysis determined that a payment recapture audit program would not be 

cost-effective for FSA programs, other grant programs, and contracts. As a result, OMB A-136 Guidance 

Table 5, Disposition of Funds Recaptured Through Payment Recapture Audits, and Table 6, Aging of 

Outstanding Overpayments Identified in the Payment Recapture Audits, have been omitted. 

(2) The Department is unable to show the breakdown of amount identified and recaptured by program due to 

system restraints. A system change was put in place during 2016 that will allow the Department to capture 

the data by program for FY 2017. 

Additional Comments 

Continuous Monitoring and Data Analytics 

The Department has a Continuous Controls Monitoring System to help detect improper 

payments. This system applies a series of integrity checks to the Department’s grant (nonFSA) payments and flags anomalous transactions for follow-up analysis. Examples of 

issues that can be detected include duplicate or incorrect drawdowns and unusual refunds 

and adjustments by grantees. The Department continues upgrading this system to expand 

the transactions being evaluated, improve the relevance of the checks with improved 
OTHER INFORMATION

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

algorithms, and integrate new sources of comparative data. A key objective of this initiative 

is development of predictive modeling to prevent improper payments to the maximum 

degree possible. 

Risk Management 

The Department took measures to prevent improper payments through the use of the 

Decision Support System to run Entity Risk Review reports for non-FSA grant awards. 

Using data drawn from the Department’s grants business system, the Federal Audit 

Clearinghouse, the Institutes of Higher Education accreditation reporting, and Dun & 

Bradstreet, this report identifies financial, programmatic, and controls risks posed by award 

to the prospective grantee. Grant officers and awarding officials use the Entity Risk Review 

reports in the preaward stage of the grant process to assess grantees’ risk and assist in the 

determination of special conditions for grant awards. They also apply these reports in 

devising monitoring plans for the life of the grant, strengthening them as the Department’s 

first line of defense against improper payments by grantees. 

In FY 2016, 100 percent of Department’s discretionary grants awards were assessed for 

risk prior to award in the areas of: financial stability; adequacy of management systems to 

meet applicable standards; performance history; and compliance with applicable laws and 

regulations, including those related to Suspension and Debarment. This work successfully 

demonstrated the Department’s early compliance with 2 C.F.R. Section 205, Federal 

Awarding Agency Review of Risk Posed by Applicants.

Payment Integrity Workgroup 

The Department has an internal workgroup intended to demonstrate payment integrity as 

opposed to being focused solely on improper payments. The workgroup includes 

representatives from different offices that are working collaboratively to evaluate the 

Department’s framework for assessing the risk of improper payments and for strengthening 

the controls on estimating, preventing, detecting, and recovering improper payments. The 

workgroup is intended to identify, categorize, assess, and improve controls, as well as to 

train staff on their responsibilities with respect to ensuring the integrity of Department 

payments. 

The Department also participates in the Improper Payments Federal Community of Practice 

group organized by the Social Security Administration. The workgroup is focused on the 

prevention of improper payments and sharing best practices between federal agencies. The 

group’s vision is to increase interagency relationships, collaboration, and cooperation; 

share ideas and best practices to map knowledge and find solutions; and use the combined 

leadership to foster innovation. 
OTHER INFORMATION

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FY 2016 Agency Financial Report—U.S. Department of Education 131 

Agency Reduction of Improper Payments with the Do Not Pay 

Initiative 

Table 7. Results of the Do Not Pay Initiative in Preventing Improper Payments 

(Dollars in Millions) 

Number (#) 

of 

payments 

reviewed 

for possible 

improper 

payments 

Dollars ($) of 

payments 

reviewed for 

possible 

improper 

payments 

Number (#) 

of 

payments 

stopped 

Dollars ($) 

of 

payments 

stopped 

Number (#) of 

potential 

improper 

payments 

reviewed and 

determined 

accurate(3)

Dollars ($) of 

potential 

improper 

payments 

reviewed and 

determined 

accurate 

Reviews with 

the IPERIA 

specified 

databases(1)

1,357,920 187,815.45 0 0 851 .247781 

Reviews with 

databases 

not listed in 

IPERIA(2)

168,787 1,564.60 0 0 171 .505709 

(1) IPERIA databases used for payment screening include the Death Master File and the System for Award 

Management. Data for the period October 1, 2015, to September 30, 2016. 

(2) Reviews with databases not listed in IPERIA include payments reviewed through the Department’s 

Continuous Controls Monitoring System (CCMS). This system applies a series of integrity checks to the 

Department’s grant (non-FSA) payments and flags anomalous transactions for follow-up analysis. Examples of 

issues that can be detected include duplicate or incorrect drawdowns and unusual refunds and adjustments by 

grantees. The Department continues upgrading this system to expand the transactions being evaluated, 

improve the relevance of the checks with improved algorithms, and integrate new sources of comparative data. 

A key objective of this initiative is development of predictive modeling to prevent improper payments to the 

maximum degree possible. Data for the period October 1, 2015, to September 30, 2016. 

(3) Payments requiring further review and identified as proper. 

The Department continues its efforts to prevent and detect improper payments via the DNP 

Business Center portal as required by IPERIA. During FY 2016, 1,357,920 payments, 

totaling $187.8 billion, were reviewed for possible improper payments through the DNP 

portal. A total of 851 payments, totaling $247,781, were further reviewed and determined to 

be accurate. The Department validated that potential improper payments identified were 

adjudicated and reported to Treasury in a timely manner. The Department also reviewed 

168,787 payment refunds, totaling $1.6 billion, for potential improper payments through the 

Continuous Controls Monitoring System. A total of 212 transactions were further reviewed 

for potential improper payments and 171 transactions, totaling $505,709, were determined 

to be accurate. 

The Department is also looking at ways to partner with the Treasury Department’s DNP

Business Center to enhance data analytics capabilities, reduce gaps, and improve 

processes to ensure payments are proper.