MANAGEMENT’S 

DISCUSSION 

AND ANALYSIS
2 FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

The U.S. Department of Education (the 

Department) continued to enhance the content 

quality, report layout, and public accessibility 

of the Fiscal Year (FY) 2018 Agency Financial Report 

(AFR) by improving graphics and providing more useful, 

balanced, and easily understood information about 

the Department’s loan programs, including additional 

cost and risk information. Additionally, we augmented 

information provided in the body of the AFR with 

relevant web content to provide users with additional 

information about the Department’s operations and 

performance. To take advantage of the hyperlinks 

embedded in the report, the Department recommends 

reading it on the Internet. To help us continue to 

improve the quality and usefulness of information 

provided in our AFR, we encourage our public and other 

stakeholders to provide feedback and suggestions at 

AFRComments@ed.gov.

This section highlights information on the Department’s 

performance, financial statements, systems and controls, 

compliance with laws and regulations, and actions taken 

or planned to address select challenges.

MISSION AND ORGANIZATIONAL STRUCTURE

This section provides information about the Department’s 

mission, an overview of its history, and its structure. The 

active links include the organization chart and principal 

offices and a link to the full list of Department offices

with a description of selected offices by function.

THE DEPARTMENT’S APPROACH 

TO PERFORMANCE

This section provides a brief summary of the 

Department’s performance goals and results for FY 2018. 

Since the Department has chosen to produce separate 

financial and performance reports, a detailed discussion 

of performance information for FY 2018 will be provided 

in the Department’s Annual Performance Report to be 

released online at the same time as the President’s 

FY 2020 Budget in February 2019. For more information, 

prior-year performance reports can be found on the 

Department’s website. We also urge readers to seek 

programmatic data as it is reported in the Congressional 

Budget Justification, as well as on the web pages of 

individual programs. Any questions or comments 

about the Department’s performance reporting should 

be e-mailed to PIO@ed.gov. For more details on 

performance, please refer to the Department’s budget and 

performance web page at www.Performance.gov.

FORWARD-LOOKING INFORMATION

The Forward-Looking Information section describes 

the challenges that the Department aims to address to 

achieve progress on Enterprise Risk Management (ERM), 

Direct Loans, Next Gen FSA, Technology Business 

Management Solutions (TBMS), and Shared Services.

FINANCIAL HIGHLIGHTS

The Department expends a substantial portion of its 

budgetary resources and cash on multiple loan and grant 

programs intended to support state and local efforts 

to improve learning outcomes for all prekindergarten 

through 12th grade (P–12) students in every community 

and to expand postsecondary education options and 

improve outcomes to foster economic opportunity 

and informed, thoughtful, and productive citizens. 

Accordingly, the Department included more highlevel details about sources and uses of the federal funds 

received and net costs by program.

ANALYSIS OF SYSTEMS, CONTROLS, AND 

LEGAL COMPLIANCE

The Department’s internal control framework 

and its assessment of controls, in accordance with 

Office of Management and Budget (OMB) Circular 

A-123, Management’s Responsibility for Enterprise Risk 

Management and Internal Control, provide assurance to 

Department leadership and external stakeholders that 

financial data produced by the Department’s business and 

financial processes and systems are complete, accurate, 

and reliable. 

ABOUT THE MANAGEMENT’S DISCUSSION AND ANALYSIS
FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION 3

MANAGEMENT’S DISCUSSION AND ANALYSIS

OUR MISSION

The U.S. Department of Education’s mission is to promote student achievement and 

preparation for global competitiveness by fostering educational excellence and 

ensuring equal access.

Who We Are. In 1867, the federal government 

recognized that furthering education was a national 

priority and created a federal education agency to 

collect and report statistical data. The Department was 

established as a cabinet-level agency in 1980. Today, the 

Department supports programs in every area and level of 

education from preschool through postdoctoral research.

The Department makes funds and information 

available to individuals pursuing education, colleges and 

universities, state education agencies, and school districts 

by engaging in four major types of activities:

 establishing policies related to federal education 

funding, including distributing funds, collecting on 

student loans, and using data to monitor the 

use of funds;

 supporting data collection and research on 

America’s schools;

 identifying major issues in education and focusing 

national attention on them; and

 enforcing federal laws promoting equal access and 

prohibiting discrimination in programs that receive 

federal funds.

Our Public Benefit. The Department executes the 

laws passed by Congress to promote student academic 

achievement and preparation for global competitiveness. 

The Department works with students, parents, 

educational institutions, school districts, and states to 

foster educational excellence and to ensure equal access 

to a high quality education for all students. While 

recognizing the primary role of states and school districts 

in providing high quality education, the Department 

is committed to helping ensure students throughout 

the nation develop skills to succeed in school, pursue 

postsecondary options, and transition to the workforce. 

The Department’s vision is to improve educational 

outcomes for all students.

Many of the Department’s programs involve awarding 

grants to state and local educational agencies and 

providing grants and loans to postsecondary students. 

The Department’s largest outlays are for its portfolio of 

student loans (see the Financial Highlights and Notes

sections). Grant programs constitute the second-largest 

driver of outlays. The grant programs include: student 

aid to help pay for college through Pell Grants, Work 

Study, and other campus-based programs; grants awarded 

based on statutory formulas mostly for elementary and 

secondary education; and competitive grant programs 

to promote innovation. The Department also supports 

research, collects education statistics, and enforces civil 

rights statutes. We manage and spend financial resources 

on programs designed to support parents, teachers, 

principals, school leadership, institutions, and states in 

the pursuit of instilling knowledge and transferring skills 

to students.

ABOUT THE DEPARTMENT
4 FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

OUR ORGANIZATION IN FISCAL YEAR 2018

This chart reflects the coordinating structure of the U.S. Department of Education. Interactive

and text versions of the FY 2018 coordinating structure of the Department are available.

 
FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION 5

MANAGEMENT’S DISCUSSION AND ANALYSIS

PERFORMANCE MANAGEMENT FRAMEWORK

In accordance with the GPRA Modernization Act of 2010, the Department’s framework for performance management 

starts with the four-year Strategic Plan, which serves as the foundation for establishing long-term priorities. It also supports 

the development of performance goals, objectives, and measures by which the Department can gauge achievement of 

its stated outcomes. In coordination with the Strategic Plan, the Department established two-year Agency Priority Goals 

(APGs). Progress towards the Department’s Strategic Plan and its APGs are measured using data-driven review and 

analysis. Additional information is available in the Annual Performance Report and Annual Performance Plan.

The FY 2018–22 Strategic Plan is comprised of four strategic goals. The Department continues to welcome input from 

Congress, state and local partners, and other education stakeholders about the Strategic Plan. Questions or comments 

about the Strategic Plan should be emailed to PIO@ed.gov.

THE DEPARTMENT’S APPROACH 

TO PERFORMANCE

Strategic Goal 1: Support state and local efforts to improve learning outcomes for all P–12 students in every community.

Strategic Objective 1.1 Increase high-quality educational options and empower students and parents to choose an education that meets 

their needs.

Strategic Objective 1.2 Provide all P–12 students with equal access to high-quality educational opportunities.

Strategic Objective 1.3 Prepare all students for successful transitions to college and careers by supporting access to dual enrollment, 

job skills development and high-quality science, technology, engineering and mathematics (STEM).

Strategic Objective 1.4 Support agencies and institutions in the implementation of evidence-based strategies and practices that build the 

capacity of school staff and families to support students’ academic performance.

Strategic Goal 2: Expand postsecondary educational opportunities, improve outcomes to foster economic opportunity and promote an 

informed, thoughtful and productive citizenry.

Strategic Objective 2.1 Support educational institutions, students, parents and communities to increase access and completion of college, 

lifelong learning and career, technical and adult education.

Strategic Objective 2.2 Support agencies and educational institutions in identifying and using evidence-based strategies or other promising 

practices to improve educational opportunities and successfully prepare individuals to compete in the global economy.

Strategic Objective 2.3 Support agencies and educational institutions as they create or expand innovative and affordable paths to relevant 

careers by providing postsecondary credentials or job-ready skills.

Strategic Objective 2.4 Improve quality of service for customers across the entire student aid life cycle.

Strategic Objective 2.5 Enhance students’ and parents’ ability to repay their federal student loans by providing accurate and timely information, 

relevant tools and manageable repayment options.

Strategic Goal 3: Strengthen the quality, accessibility and use of education data through better management, increased privacy protections 

and transparency.

Strategic Objective 3.1 Improve the Department’s data governance, data life cycle management and the capacity to support education data.

Strategic Objective 3.2 Improve privacy protections for, and transparency of, education data both at the Department and in the 

education community.

Strategic Objective 3.3 Increase access to, and use of, education data to make informed decisions both at the Department and in the 

education community.

Strategic Goal 4: Reform the effectiveness, efficiency and accountability of the Department.

Strategic Objective 4.1 Provide regulatory relief to educational institutions and reduce burden by identifying time-consuming regulations, 

processes and policies and working to improve or eliminate them, while continuing to protect taxpayers from 

waste and abuse.

Strategic Objective 4.2 Identify, assess, monitor and manage enterprise risks.

Strategic Objective 4.3 Strengthen the Department’s cybersecurity by enhancing protections for its information technology infrastructure, 

systems and data.

Strategic Objective 4.4 Improve the engagement and preparation of the Department’s workforce using professional development and 

accountability measures.

FY 2018–22 Strategic Goals and Strategic Objectives1

1

 The FY 2018 Statement of Net Cost and related notes have been updated to align with the new FY 2018–22 Strategic Plan.
6 FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

THE DEPARTMENT’S AGENCY PRIORITY GOALS (APGs)

The Department identified four APGs for FY 2018–19. Improving education starts with allowing greater decision-making 

authority at the state and local levels and empowering parents and students with educational options. These APGs aim 

to increase educational choice, improve the customer service the Department provides student aid borrowers, ensure 

protections of student privacy, and reduce red tape. The effective implementation of the Department’s APGs will depend, 

in part, on the effective use of high-quality and timely data, including evaluations and performance measures. Quarterly 

updates for the APGs are available on www.Performance.gov.

APG Related Strategic Objective

Improve the access to, and the quality and transparency of, school 

choice options for K–12 students. By September 30, 2019, the Charter 

School Program (CSP) will support the creation and expansion of 300 new 

charter schools nationally. The CSP will also support the enrollment of 

50,000 students in new charter schools. Additionally, by September 30, 

2019, the Department will disseminate eight resources, at least one per 

quarter, on evidence-based and promising practices related to school choice.

Strategic Objective 1.1: Increase high-quality educational options 

and empower students and parents to choose an education that 

meets their needs.

Improve borrowers’ access to quality customer service.

By September 30, 2019, Federal Student Aid will improve customers’ 

access to and availability of quality customer service by decreasing 

the overall average speed of answer to 60 seconds or less, decreasing 

abandoned rates to three percent or less and requiring all non-default 

federal student loan servicers to expand and standardize call center hours. 

Strategic Objective 2.4: Improve quality of service for customers 

across the entire student aid life cycle.

Improve student privacy and data security at Institutions of Higher 

Education (IHEs) through outreach and compliance efforts.

By September 30, 2019, the Department will increase information security 

program outreach activities to IHEs by 40% in order to help protect 

IT systems and data privacy and commence audits of IHEs subject to 

A-133 and Gramm-Leach-Bliley Act (GLBA), resulting in 36 IHEs (from a 

baseline of zero) completing an audit of GLBA-related information security 

safeguards with no significant findings.

Strategic Objective 3.2: Improve privacy protections for, and 

transparency of, education data both at the Department and in the 

education community.

Provide regulatory relief to education stakeholders.

By September 30, 2019, the Department will reduce the regulatory 

burden on education stakeholders by submitting to OMB no less than 

25 deregulatory actions (against a baseline of zero (0) for FYs 2015 

and 2016).

Strategic Objective 4.1: Provide regulatory relief to educational 

institutions and reduce burden by identifying time-consuming 

regulations, processes and policies and working to improve or 

eliminate them, while continuing to protect taxpayers from waste 

and abuse.

Goal 1. Support state and local efforts to 

improve learning outcomes for all 

P–12 students in every community.

Strategic Goal 1 focuses on outcomes related to 

the transition from the No Child Left Behind Act to 

implementation of the Every Student Succeeds Act (ESSA), 

which reauthorized the Elementary and Secondary 

Education Act in December 2015. The hallmark of the 

ESSA is the flexibility it provides for states to do what is 

best for children while preserving important protections 

for economically disadvantaged students, children 

with disabilities, English learners, and other vulnerable 

students. The law requires that states take steps to ensure 

all students have access to excellent teachers and positive, 

safe learning environments that equip them for college 

and career success.

The Agency Priority Goal associated with Strategic 

Goal 1 focuses on expanding educational choice options 

for parents and students. Specifically, the APG aims to 

improve the access to, and the quality and transparency of, 

school choice options for K–12 students.

APG for FY 2018–2019: Improve the access 

to, and the quality and transparency of, 

school choice options for K–12 students.

By September 30, 2019, the Charter School Program 

(CSP) will support the creation and expansion of 

300 new charter schools nationally. The CSP will 

also support the enrollment of 50,000 students in new 

charter schools. Additionally, by September 30, 2019, 

the Department will disseminate eight resources, 

at least one per quarter, on evidence-based and 

promising practices related to school choice.
FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION 7

MANAGEMENT’S DISCUSSION AND ANALYSIS

To achieve this APG, the Department focused on 

the implementation of its Charter School Program, 

including conducting new competitions and providing 

technical assistance to current grantees. Through CSP, 

the Department supported 134 new charter schools in 

school year 2017–18. The FY 2018 performance target for 

new charter schools was set at 150. Of significant note, 

preliminary data indicate that the total number of students 

enrolled in CSP-supported schools is over 1.6 million, 

which exceeds the FY 2018 target of 1,564,854 (Prior 

Year + 25,000). Additionally, the Department released 

five evidence-based and promising practice resources 

related to educational choice. The Department expects 

to continue to support research in this area through a 

National Center for Research on Education Access and 

Choice (REACH). In July 2018, the Department awarded 

a five-year grant to the REACH Center to complete two 

central activities: carrying out studies and developing the 

National Longitudinal School Choice Database (NLSCD). 

Through a set of 34 studies (quantitative and qualitative), 

the REACH Center will examine five types of state and 

district policies regarding school choice to identify how 

these policies can be structured to improve the education 

received by disadvantaged students. Additional information 

on this APG is available on www.Performance.gov. 

Goal 2. Expand postsecondary educational 

opportunities, improve outcomes to foster 

economic opportunity and promote an informed, 

thoughtful and productive citizenry.

Strategic Goal 2 focuses on expanding the Department’s 

efforts to support innovative and accessible paths to 

postsecondary credentials and job-ready skills training. 

In addition to supporting expanded postsecondary 

opportunities, the Department has a number of initiatives 

focused on affordability. These initiatives ensure borrowers 

have the best information available to make postsecondary 

program selection and associated borrowing decisions. The 

Department also continues to help students understand their 

financial aid options and repayment obligations. The Agency 

Priority Goal associated with Strategic Goal 2 focuses on 

improving borrowers’ access to quality customer service.

Improving access to information and the speed of 

response will allow customers to have expanded access to 

the resources they need to manage their federal student 

loans successfully, which will empower students and help 

them to reduce the risk of delinquency and default. The 

office of Federal Student Aid (FSA) plans to have the 

Next Generation Financial Services Environment (Next 

Gen FSA) transform the student aid customer experience 

with the use of industry best-in-class financial services 

technologies. Due to the rapid development of Next Gen 

FSA, FSA reevaluated and suspended its plan for the 

expansion of call center hours across all servicers. Despite 

this change, FSA continued to communicate with servicers 

regarding expectations for improvements to average 

speed to answer (ASA) and average abandon rate (AR) 

metrics. For FY 2018, the overall average speed to answer 

was 65.97 seconds (from 76.9 seconds in FY 2017; FY 

2018 performance target is less than 70 seconds) and the 

abandonment rate was 3.9 percent (from 3.8 percent in 

FY 2017; FY 2018 performance target is less than three 

percent). FSA delivered the first tangible result of Next 

Gen FSA that customers will be able to see and touch: a 

redesigned fafsa.gov. The website’s pages fit the screen size 

and shape of any device, including desktop computers, 

laptop computers and mobile devices, such as smartphones 

or tablets. The beta mobile application, for the 2017–2018 

FAFSA® form, was rolled out in August 2018. On October 

1, 2018, FSA launched the fully functional myStudentAid 

mobile app, featuring the myFAFSA component, which 

allows individuals to complete and submit the 2019–20 

FAFSA® form. FSA’s flagship website for professionals, the 

Financial Aid Toolkit, received 139,168 visits in FY 2018. 

FSA also leveraged social media, in-person events, and the 

Information for Financial Aid Professionals (IFAP) website 

to disseminate news, information, and updates that IHEs 

need to participate in the Title IV programs successfully. 

Additional information on this APG is available on 

www.Performance.gov.

The website visits for FinancialAidToolkit.ed.gov (the 

website for counselors and mentors) has decreased from 

FY 2017 to FY 2018. In FY 2017, FSA launched the 

FAFSA on October 1 and required tax data from an 

earlier tax year than in the past. That year, we conducted 

a large multichannel marketing effort to ensure our 

customers knew of the changes. One piece of this effort 

was to engage our partners and direct them to the Toolkit 

website for resources. In FY 2018, we did not conduct 

a marketing campaign around the FAFSA. As a result 

the visits to the Toolkit website dropped. In FY 2019, 

we plan to once again conduct a large multichannel 

marketing effort around the launch of the 2019–20 

APG for FY 2018–2019: Improve borrowers’ 

access to quality customer service.

By September 30, 2019, Federal Student Aid will 

improve customers’ access to and availability of 

quality customer service by decreasing the overall 

average speed of answer to 60 seconds or less, 

decreasing abandoned rates to three percent or less 

and requiring all non-default federal student loan 

servicers to expand and standardize call center hours.
8 FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

Department cannot yet report on the number of IHEs 

passing an audit of GLBA-related information security 

safeguards. Additional information on this APG is 

available on www.Performance.gov.

Goal 4. Reform the effectiveness, efficiency and 

accountability of the Department.

The Department’s organizational capacity relies not 

only on our human capital but also on other resources, 

including physical, material, financial, and informational 

resources. Strategic Goal 4 focuses on improving the 

Department’s processes, such as reviewing regulations, 

and where appropriate, on repealing, replacing or 

modifying regulations. The APG associated with 

Strategic Goal 4 aims to provide regulatory relief to 

education stakeholders. 

The Department intends to reduce the regulatory 

burden on stakeholders through review, rescission, and 

modification of outdated, burdensome regulations 

and guidance. The goal will be achieved through a 

comprehensive review of the Department’s regulations 

and guidance to identify those that are overly 

burdensome, inconsistent with Administration priorities, 

unnecessary, outdated, or ineffective. Based on that 

review, the Department will determine whether such 

regulations or guidance need to be modified or rescinded 

and will then take appropriate action consistent with 

applicable law. For FY 2018, the Department submitted a 

total of 24 deregulatory actions, including four significant 

deregulatory actions reflected on reginfo.gov and 20 

requests for significance determination of deregulatory 

actions submitted to OMB via e-mail (FY 2018 

performance targets are two and 13, respectively). The 

Department published two key deregulatory actions: the 

Significant Disproportionality Delay Rule and the State 

Authorization Distance Education Delay Rule. These 

actions provide an estimated $13.1 million in cost savings 

for the regulated communities over the next two years. 

This number includes $7.5 million in cost savings for 

the Significant Disproportionality Delay Rule and $5.6 

million for the State Authorization Distance Education 

Delay Rule.

FAFSA. We anticipate the number of visits to the 

FinanicalAidToolkit.ed.gov will increase in FY 2019.

Goal 3. Strengthen the quality, accessibility 

and use of education data through better 

management, increased privacy protections 

and transparency.

Strategic Goal 3 focuses on strengthening data-driven 

decision-making in education by focusing on the ways 

we manage and make available education data, while 

protecting student privacy. The Department is committed 

to improving how staff and stakeholders access, use, and 

share meaningful data on education while protecting 

privacy. These improvements enable the Department and 

other stakeholders in the education community to better 

provide the public with the information necessary to 

make informed decisions on behalf of their communities, 

states, and local districts. The Agency Priority Goal 

associated with Strategic Goal 3 focuses on improving 

student privacy and data security at IHEs through 

outreach and compliance efforts. Additional information 

on this APG is available on www.Performance.gov.

The Department plans to achieve this APG through 

collaborative efforts involving training, outreach, 

monitoring, and reporting. In FY 2018, FSA and the 

Department’s Privacy Technical Assistance Center 

(PTAC) collaborated to conduct 63 outreach activities 

targeting data privacy and IT security requirements of 

IHE. Many of the outreach activities performed were 

sessions at large conferences (e.g., the sessions at the 

FSA training conference that PTAC gave with 400+ 

attendees per session) and 97% of attendees at two PTAC 

sessions in California and Arkansas agreed or strongly 

agreed that it was helpful. The Office of Management 

and Budget did not include the new audit standards for 

GLBA-related information security safeguards in the 

audit compliance supplement this year. As such, the 

APG for FY 2018–2019: Improve student 

privacy and data security at Institutions of 

Higher Education (IHEs) through outreach 

and compliance efforts.

By September 30, 2019, the Department will increase 

information security program outreach activities to 

IHEs by 40% in order to help protect IT systems 

and data privacy and commence audits of IHEs 

subject to A-133 and the Gramm-Leach-Bliley Act

(GLBA), resulting in 36 IHEs (from a baseline of zero) 

completing an audit of GLBA-related information 

security safeguards with no significant findings.

APG for FY 2018–2019: Provide regulatory 

relief to education stakeholders.

By September 30, 2019, the Department will reduce 

the regulatory burden on education stakeholders 

by submitting to OMB no less than 25 deregulatory 

actions (against a baseline of zero (0) for 

FYs 2015 and 2016).
FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION 9

MANAGEMENT’S DISCUSSION AND ANALYSIS

FINANCIAL HIGHLIGHTS

BALANCE SHEETS 

The consolidated balance sheets present, 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 $1,328.0 billion as of 

September 30, 2018. The vast majority of the assets 

relate to credit program receivables, which comprised 

91.2 percent of all assets. Direct Loans comprise the 

largest share of these receivables, totaling $1,115.1 

billion. All other assets totaled $117.1 billion, most of 

which was Fund Balance with Treasury.

The Department’s liabilities totaled $1,279.2 billion as 

of September 30, 2018. 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. Debt associated with Direct Loans totaled 

$1,150.6 billion as of September 30, 2018. 

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 17 consecutive

years, the Department has earned an unmodified (or

“clean”) audit opinion. The financial statements and notes

for FY 2018 are on pages 28–67 and the Independent

Auditors’ Report begins on page 76.

 

 
10 FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

Figure 3 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 2014 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. 

In accordance with the Federal Credit Reform Act of 1990

(FCRA), the Department’s financial statements report the 

value of direct loans and loan guarantees (credit program 

receivables) at the net present value of their future cash 

flows, discounted at a fixed rate established based on 

Treasury securities. The difference between the recorded 

principal and interest balance and the net present value 

of the loans is referred to as the “allowance for subsidy” 

which can be positive or negative.

Prior years’ positive allowance for subsidy balances 

represented estimates of funds expected to be recovered 

in excess of principal loaned less anticipated defaults, 

loan cancellations, and other adjustments. These 

positive allowance for subsidy balances resulted 

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 positive allowance since FY 2014 is due 

primarily to higher subsidy costs, the main cause being 

high participation in income-driven repayment plans. 

As of FY 2017, the allowance for subsidy changed to a 

negative balance. In practical terms, this means that the 

present value of funds expected to be recovered is now 

less than the principal outstanding.

 

Direct Loan 

Component 

(Dollars

 in Billions)

Fiscal Year

2014 2015 2016 2017 2018

Principal $ 694.0 $ 800.8 $ 902.8 $ 998.8 $ 1,083.7 

Rate of 

Increase in 

Principal

18.7% 15.4% 12.7% 10.6% 8.5%

Accrued Interest $ 37.1 $ 44.3 $ 50.8 $ 59.5 $ 72.0

Allowance for 

Subsidy $ 47.4 $ 35.5 $ 5.3 $ (16.8) $ (40.7)

Total No. of 

Direct Loan 

Recipients 

(in Millions)

27.9 29.9 31.5 33.0 34.2 Loan Status

Fiscal Year

2014 2015 2016 2017 2018

Total No. of 

Direct Loan 

Recipients 

(in Millions)

27.9 29.9 31.5 33.0 34.2

Total Dollar 

Amount of 

Direct Loans 

Outstanding

 $ 731.2 $ 845.1 $ 953.6 $ 1,058.4 $ 1,155.7 

Current 

Repayment1 247.2 332.0 406.8 467.9 531.4

In School, 

Grace Period, 

and Education 

Deferments

281.8 284.3 289.6 291.7 291.7

Forbearance 

and 

Noneducation 

Deferments

97.8 103.0 106.5 122.5 121.9

Delinquent 

(Past Due 

31–360 Days)

54.6 65.1 71.8 79.5 92.2

Default/

Bankruptcy/

Other

49.8 60.7 78.9 96.8 118.5

1 Loans in Current Repayment status include loans that are being repaid ontime. However, these on-time loans can include loans for which the amount 

of interest accruing is higher than payments that are being made, which can 

occur in the case of loans on income-driven repayment plans.

Table 1. Payment Status of Direct Loan 

Principal and Interest Balances

(Dollars in Billions)
FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION 11

MANAGEMENT’S DISCUSSION AND ANALYSIS

Participation in income-driven repayment plans has 

increased as (a) plans have become available that are 

more advantageous to borrowers, (b) 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 percentage of borrowers 

in income-driven repayment plans has grown from 10.6 

percent in FY 2013 to 30.0 percent in FY 2018.

Table 1 shows the payment status of the Direct Loan 

principal and interest balances outstanding over the 

past 5 years. The Current Repayment category consists 

of loans that are being paid back on time, including 

the current portion of loans being repaid pursuant to 

income-driven repayment plans. 

Loans in the Delinquent category are past due 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. While technical default 

is 271 days delinquent, default is defined as 361 days 

delinquent for reporting purposes. 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 or rehabilitate. The percentage 

 

of the portfolio in current repayment, which rose from 

34 percent in FY 2014 to 46 percent in FY 2018, has 

eclipsed payments temporarily postponed and has grown 

far faster than loans in default. 

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. Figure 

4 shows the Direct Loan program cumulative borrowing 

and repayment activity that resulted in the debt amount 

on the balance sheet. Figure 6 (see page 12) illustrates 

the Direct Loan program financing process and provides 

financing and disbursing trend data.

STATEMENTS OF NET COST

The consolidated statements of net cost report the 

Department’s components of the net cost of operations 

for each fiscal year. Net cost of operations consists of 

the gross costs incurred less any exchange (i.e., earned) 

revenue from activities. Gross costs are composed of the 

cost of credit and grant programs, and operating costs. 

Exchange revenue is primarily interest earned on credit 

program loans. Figure 5 shows the Department’s gross 

costs and earned revenue over the past five years.
12 FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

Treasury Financing and Subsidy Cost of Direct Loans (Dollars in Billions)

Fiscal Year 2014 2015 2016 2017 2018 

Net Borrowing 120.6 90.9 84.4 67.3 89.1 

 Borrowing from Treasury 171.2 159.7 147.0 160.5 155.3 

 Debt Repayments to Treasury (50.6) (68.7) (62.6) (93.2) (66.2) 

Interest Expense to Treasury (25.2) (27.6) (30.5) (31.3) (32.3)

Interest Earned from Treasury 3.7 4.2 3.9 4.3 3.9 

Cumulative Taxpayer Cost / (Savings) (47.4) (35.5) (5.3) 16.8 40.7 

Current Subsidy Expense (Revenue) 8.1 (0.9) 16.1 5.3 7.4 

Direct Loan Program Cash Transactions with Borrowers (Dollars in Billions)

Fiscal Year 2014 2015 2016 2017 2018 

Loan Disbursements 134.1 142.2 140.5 142.5 134.1

 Stafford Subsidized 25.9 24.0 23.8 23.4 20.3 

 Stafford Unsubsidized 54.7 52.7 52.3 51.4 49.0 

 PLUS 18.9 19.2 19.0 18.7 23.1 

 Consolidation1 34.5 46.4 45.5 49.0 41.6 

Loan Collections2 48.8 65.1 73.2 82.0 84.9 

 Principal 36.3 50.0 55.9 62.6 63.5 

 Interest 10.8 13.4 15.5 17.6 19.5 

 Fees 1.8 1.8 1.8 1.9 1.9 

* Numbers may not add up due to rounding.

1 Consolidation amounts stem from a number of loan programs, including most notably the Federal Family Education Loan (FFEL) program, in 

addition to Direct Loans. 

2 Loan collections include prepayments, including prepayments in full due to consolidation of underlying loans.

 
FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION 13

MANAGEMENT’S DISCUSSION AND ANALYSIS

GROSS COSTS AND EXCHANGE REVENUE BY TYPE 

The major components of the Department’s gross costs and earned revenue include three primary components:

 Credit program interest expense offset by credit program interest revenue and administrative fees as the result of 

subsidy amortization; 

 Credit program subsidy expense (see Analysis of Direct Loan Program Subsidy Expense below); and

 Grant expenses (see Figure 9). 

 

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 present value cost of 

providing direct loans, but excludes the administrative 

costs of issuing and servicing the loans. The Department 

estimates subsidy expense using a set of econometric and 

financial models, as well as cash flow models.

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). Figure 8 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, and assumptions concerning borrowers’ 

selection of repayment plans, impact the estimated cost 

calculation and determine whether the overall subsidy 

expense is positive or negative. Subsidy expense for new 

2014 2015 2016 2017 2018

Subsidy Expense for 

New Loans Disbursed 

in the Current Year

 $ (22.1) $ (6.2) $ (5.7) $ (2.6) $ (3.1) 

Subsidy 

Re-estimates 30.2 (4.6) 21.8 7.9 7.4

Loan Modification - 9.9 - - 0.1

Total Subsidy 

Expense $ 8.1 $ (0.9) $ 16.1 $ 5.3 $ 4.4

 
14 FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

loans disbursed in the current year has 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.

Direct Loan program re-estimated subsidy cost was adjusted 

upward by $7.4 billion in FY 2018. Re-estimated costs only 

include cohorts that are 90 percent disbursed; cohort years 

1994–2017. 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. 

 Income-Driven Repayment (IDR) Model Changes—

In 2018, the Department updated several assumptions 

within its IDR submodel and refined the logic for 

borrowers switching between IDR plans. These updates 

led to a net downward re-estimate of $4.1 billion.

 Repayment Plan Selection—The Department 

incorporated new repayment plan data that showed 

a continuing increase in IDR plan usage. The update 

also reflects changes in interpretation of repayment 

plan codes for Direct Loan consolidations. Much of the 

consolidation loan volume that was previously classified 

as standard (ten-year fixed) is now classified as extended. 

Also, the Department changed the methodology for 

assigning and forecasting plans from an origination 

cohort basis to an enter repayment cohort basis. Lastly, 

the Department placed limits on forecasted growth of 

IDR participation to reflect an anticipated saturation 

point. The combined effect of these changes was a net 

upward re-estimate of $2.1 billion.

 Default Rates—The Department made updates to the 

default rate model in FY 2018, primarily reflecting 

updates in the data, which led to a net upward reestimate of $14.8 billion.

The Department has more than 100 grant and loan 

programs (www.ed.gov/programs/inventory.html). The 

Department’s FY 2018 expenses for grant programs 

totaled $71.8 billion. The three largest grant programs are:

 Pell Grants—provides need-based grants to students 

to promote access to postsecondary education. 

Grant amounts are dependent on: the student’s 

expected family contribution; the cost of attendance 

(as determined by the institution); the student’s 

enrollment status (full-time or part-time); and 

whether the student attends for a full academic year 

or less. Pell grants are the single largest source of grant 

aid for postsecondary education.

 Education for the Disadvantaged—primarily consists 

of Title I grants that provide financial assistance 

through state educational agencies to local educational 

agencies and public schools with high numbers or 

percentages of poor children to help ensure that all 

children meet challenging state academic content 

and student academic achievement standards. Also 

provides funds to states to support educational 

services to children of migratory farmworkers and 

fishers, and to neglected or delinquent children and 

youth in State-run institutions, attending community 

day programs, and correctional facilities.

 Special Education—primarily consists of Individuals 

with Disabilities Education Act (IDEA) grants that 

provide funds by formula to states to assist them 

in providing a free appropriate public education in 

the least restrictive environment for children with 

disabilities ages 3 through 21 and assists states in 

providing early intervention services for infants and 

toddlers from birth through age two and their families. 

Also provides discretionary grants to institutions of 

higher education and other nonprofit organizations to 

support research, demonstrations, technical assistance 

and dissemination, technology, personnel development 

and parent-training, and information centers.

 
FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION 15

MANAGEMENT’S DISCUSSION AND ANALYSIS

generally accepted accounting principles for federal 

entities and the formats prescribed by OMB. Reports 

used to monitor and control budgetary resources are 

prepared from the same books and records. The financial 

statements should be read with the realization that they 

are for a component of the U.S. Government.

 

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. 

STATEMENTS OF CHANGES IN NET POSITION

The consolidated statements of changes in net position 

report 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. 

STATEMENTS OF BUDGETARY RESOURCES

The combined statements of budgetary resources present 

information on how budgetary resources were made 

available and their status at the end of the fiscal year. 

Information in the statements is based on budgetary 

transactions as prescribed by OMB and Treasury.

The Department’s budgetary resources totaled $358.5 

billion for the period ended September 30, 2018, 

decreasing from $398.5 billion, or approximately 10.0 

percent from the prior year. Budgetary resources are 

comprised of appropriated budgetary resources of $113.1 

billion and non-budgetary credit reform resources 

of $245.4 billion. The non-budgetary credit reform 

resources are predominantly borrowing authority for the 

loan programs. 

The Department’s gross outlays totaled $298.6 billion 

for the period ended September 30, 2018. Gross 

outlays are primarily comprised of credit program loan 

disbursements and claim payments, credit program 

subsidy interest payments to Treasury, and grant 

payments. Credit program gross outlays were offset 

by $124.4 billion of collections—primarily principal, 

interest, and subsidy collections. 

LIMITATIONS OF THE FINANCIAL STATEMENTS

The principal financial statements are prepared to report 

the financial position and results of operations of the 

reporting entity, pursuant to the requirements of 31 

U.S.C. § 3515(b). The statements are prepared from 

the Department’s books and records in accordance with 

Billions %

CREDIT PROGRAMS $ 221.3 74.3%

DIRECT LOAN PROGRAM 205.0 68.9%

FFEL PROGRAM 15.6 5.2%

OTHER CREDIT PROGRAMS FOR 

HIGHER EDUCATION 0.7 0.2%

GRANTS $ 73.8 24.6%

PELL GRANTS 28.2 9.4%

EDUCATION FOR 

THE DISADVANTAGED 15.3 5.1%

SPECIAL EDUCATION - INDIVIDUALS 

WITH DISABILITIES ACT (IDEA) GRANTS 12.9 4.3%

ALL OTHER GRANTS 17.4 5.8%

CONTRACTUAL SERVICES $ 2.8 0.9%

PERSONNEL COMPENSATION 

AND BENEFITS $ 0.6 0.2%

OTHER $ 0.1 0.0%

TOTAL $ 298.6 100.0%

 
16 FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

MANAGEMENT ASSURANCES

The Secretary of Education’s 2018 Statement of Assurance provided below is the final report produced by the 

Department’s annual assurance process. Although the Department has not identified any material weaknesses, 

it acknowledges that there are significant weaknesses and management challenges to be addressed that are 

identified elsewhere in this report.

STATEMENT OF ASSURANCE

FISCAL YEAR 2018

November 14, 2018

The Department of Education (the Department) management is responsible for meeting 

the objectives of the Federal Managers’ Financial Integrity Act of 1982 (FMFIA) by 

establishing, maintaining, evaluating and reporting on the Department’s internal control 

and financial systems. 

In accordance with Section 2 of FMFIA and Office of Management and Budget (OMB) 

Circular A-123, Management’s Responsibility for Enterprise Risk Management and Internal 

Control, management evaluated the effectiveness of the Department’s internal controls 

to support effective and efficient operations, reliable reporting and compliance with 

applicable laws and regulations.

Section 4 of FMFIA and the Federal Financial Management Improvement Act of 1996

(FFMIA) require management to ensure the Department’s financial management systems 

provide reliable, consistent disclosure of financial data. In accordance with Appendix D 

of OMB Circular A-123, management evaluated whether the Department’s financial 

management systems substantially complied with FFMIA requirements. The Department 

also conducted a separate assessment of the effectiveness of its internal control over 

financial reporting, including controls designed to prevent, detect and recover improper 

payments, in accordance with Appendix A of OMB Circular A-123.

The Department has not identified any material weaknesses in operations, reporting or 

compliance with applicable laws and regulations. 

Based on the results of the Department’s assessments described above, our system of 

internal controls provides Department management with reasonable assurance that the 

objectives of sections 2 and 4 of the FMFIA were achieved as of September 30, 2018.

Betsy DeVos

ANALYSIS OF SYSTEMS, CONTROLS, 

AND LEGAL COMPLIANCE
FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION 17

MANAGEMENT’S DISCUSSION AND ANALYSIS

The Department maintains a comprehensive internal 

control framework and assurance process as depicted in 

the following diagram. 

INTRODUCTION

Strong risk management practices and internal control 

help an entity run its operations efficiently and effectively, 

report reliable information about its operations and 

financial position, and comply with applicable laws 

and regulations. The FMFIA requires federal agencies 

to establish internal controls that provide reasonable 

assurance that agency objectives will be achieved. 

OMB Circular A-123, Management’s Responsibility 

for Enterprise Risk Management and Internal 

Control implements FMFIA and defines management’s 

responsibilities for ERM and internal control. The 

Circular provides guidance to federal managers to 

improve accountability and effectiveness of federal 

programs, as well as mission support operations through 

implementation of ERM practices and by establishing, 

maintaining, and assessing internal control effectiveness. 

The guidance requires federal agencies to provide 

reasonable assurance that it has met the three objectives 

of internal controls:

 Operations—Effectiveness and efficiency of operations; 

 Reporting—Reliability of reporting for internal and 

external use; and 

 Compliance—Compliance with applicable laws 

and regulations. 

This section describes the Department’s internal control 

framework, an analysis of the effectiveness of its internal 

controls, and assurances provided by the Department’s 

leadership that internal controls were in place and 

working as intended during FY 2018 to meet the 

three objectives.

Control Framework

The Department’s internal control framework helps to 

ensure that the Department achieves its strategic goals 

and objectives related to delivering education services 

effectively and efficiently while complying with applicable 

laws and regulations and preparing accurate reports. This 

includes providing reasonable assurance to Department 

leadership and external stakeholders that financial data 

produced by the Department’s financial systems are 

complete, accurate, and reliable enough to support the 

preparation and fair presentation of financial statements 

that conform to federal standards, facilitate sound 

financial decision-making, and provide transparency 

about how the Department spent federal funds and 

maintains stewardship over its financial resources.

 
18 FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

ANALYSIS OF CONTROLS

Overall, the Department relies on the principal office 

annual assurances, supported by risk-based internal 

control evaluations and testing, to provide reasonable 

assurance that its internal controls are well designed and 

in place and working as intended. The Department also 

considers issues identified by external auditors. During 

FY 2016, the Department revised its annual assurance 

process to conform to the new requirements contained 

in the revised U.S. Government Accountability Office 

publication, Standards for Internal Control in the Federal 

Government (commonly referred to as the “Green Book”). 

In FY 2018, the Department further revised the process 

to conform to the revised OMB Circular A-123 issued on 

July 15, 2016.

In FY 2018, the Department identified no material 

control weaknesses related to effective, efficient program 

operations and no areas of noncompliance with laws 

and regulations other than those noted in the Internal 

Control Exceptions section below. Although no material 

weaknesses were identified, the Department realizes that 

it has areas of control that need further strengthening, 

such as those disclosed in this report, the Independent 

Auditors’ Report, and the major challenges identified by 

the Department’s OIG in its OIG FY 2019 Management 

Challenges report. The Department continues to 

demonstrate its commitment to addressing, mitigating, 

or resolving its identified management challenges.

In accordance with OMB Circular A-123, the 

Department also conducted an additional assessment of 

the effectiveness of the Department’s internal controls 

over financial reporting and compliance with key financial 

management laws and regulations as described below. 

Internal Control over Financial Reporting 

The Department maintains strong internal controls 

to identify, document, and assess internal control over 

financial reporting, which includes: 

 comprehensive process documentation for the 

Department’s significant business processes 

and subprocesses,

 maintenance of a control catalogue comprised of 

3,934 key financial, operational, and Information 

Technology (IT) controls that align to the business 

processes (the Department documented 398 key 

controls and FSA documented 3,536 key controls 

[1,541 Business Process and Entity-Level controls and 

1,995 IT controls]), 

The Office of the Chief Financial Officer (OCFO) 

manages the assurance process on behalf of Department 

leadership. The Department established governance 

over the process, consisting of a Senior Management 

Council, a Senior Assessment Team (SAT), and a Core 

Assessment Team (CAT). The Senior Management 

Council is comprised of senior leaders from across the 

Department. It is the primary governance structure 

for ensuring overall management and efficiency of 

Department activities, especially with respect to process, 

procedures, and administrative structures, including 

providing strategic direction for the implementation 

of the internal control program. The SAT and CAT 

include representatives from OCFO, the Office of 

the Chief Information Officer (OCIO), student loan 

and grant-making program offices, Risk Management 

Service, and other operational support offices (including 

the Office of Management). The SAT and CAT provide 

greater oversight and monitoring of activities related to 

internal control assessments. 

The annual assurance process is the primary mechanism 

by which the Department implements FMFIA and 

OMB requirements pertaining to internal control. It 

requires the head of each principal office to evaluate 

its respective internal controls and to assert, in a letter 

to the Chief Financial Officer, that it has reasonable 

assurance that key internal controls are in place and 

working as intended or to provide a detailed description 

of significant deficiencies, material weaknesses, and 

other matters of nonconformance. In making this 

assessment, the head of the principal office considers 

information such as office managers’ personal knowledge 

of operations, external audit results, internal assessments, 

and other related material. 

OCFO staff work with the principal offices to help 

them identify potential control deficiencies and 

consult with the SAT to determine whether they 

represent significant deficiencies or potential material 

weaknesses. Any principal office that identifies a 

significant deficiency or material weakness must prepare 

a Corrective Action Plan to address the issue. These 

Corrective Action Plans, in addition to daily operational 

oversight and management-initiated evaluations, 

facilitate the correction and monitoring of controls. 

If potential material weaknesses are identified, they 

are evaluated by the Senior Management Council 

to determine if they should be reported on the 

Department’s Statement of Assurance.
FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION 19

MANAGEMENT’S DISCUSSION AND ANALYSIS

 Grants Management System (G5),

 E2 Travel System, and

 Hyperion Budget Planning.

The Department designated the FMSS as a missioncritical system that provides core financial management 

services, and focused its system strategy on the following 

areas during FY 2018: 

 Managing and implementing cross-validation 

rules throughout the fiscal year to prevent invalid 

accounting transactions from being processed,

 Transmitting the Department’s spending data related 

to contracts, grants, loans, and other financial 

assistance awards for the USASpending.gov initiative 

as part of the Federal Funding Accountability and 

Transparency Act of 2006,

 Transmitting the entire Department’s payments through 

the Department of Treasury Secure Payment System,

 Transmitting the Department’s spending data related to 

contracts, grants, loans, and other financial assistance 

awards for the DATA Act implementation, and

 Initiating the upgrade of the FMSS Oracle E-Business 

Suite application to Oracle R12, to ensure continued 

vendor support, improved security, improved 

infrastructure, and enhanced functionality.

In FY 2019, EDCAPS will continue to provide customer 

service and improve security of its systems by completing 

the Department’s implementation of Oracle E-Business 

Suite R12. In doing so, the Department will be current 

and ready to provide a more secure and better integrated 

financial management application.

The Department’s financial management systems are 

designed to support effective internal control and 

produce accurate, reliable, and timely financial data 

and information. Based on self-assessments, systemlevel general controls tests, and the results of internal 

and external audits, the Department has not identified 

any material weaknesses in controls over systems. The 

Department has also determined that its financial 

management systems substantially comply with FFMIA 

requirements. However, as noted below in the Internal 

Control Exceptions section, the Department continues to 

address issues and improve its controls over systems.

 technical assistance provided to principal offices to help 

them understand and assess key financial controls,

 a risk-based testing strategy, and

 a process to develop corrective action plans when 

control deficiencies are found and to track progress 

against those plans.

During FY 2018, the Department assessed the design 

and operating effectiveness of 2,767 key financial, 

operational, and IT process controls (the Department 

assessed 119 key controls and FSA assessed 2,648 key 

controls [1,287 Business Process and Entity-Level 

controls and 1,361 IT controls]).

Although some control deficiencies were detected, the 

Department did not identify any significant deficiencies 

or material weaknesses. Corrective actions have been 

initiated for the deficiencies identified. As a function of 

this assessment, the Department tested the key financial 

controls over the Digital Accountability and Transparency 

Act of 2014 (DATA Act) reporting and concluded that 

the controls are designed and operating effectively.

INTERNAL CONTROL OVER FINANCIAL 

MANAGEMENT SYSTEMS

The FFMIA requires management to ensure that the 

Department’s financial management systems consistently 

provide reliable data that comply with federal financial 

management system requirements, applicable federal 

accounting standards, and the U.S. Standard General 

Ledger at the transaction level. Appendix D to OMB 

Circular A-123, Compliance with the Federal Financial 

Management Improvement Act of 1996, and OMB Circular 

A-130, Managing Federal Information as a Strategic 

Resource, provide specific guidance to agency managers 

when assessing conformance to FFMIA requirements. 

The Department’s core financial systems are under the 

umbrella of the Education Central Automated Processing 

System (EDCAPS), serving approximately 8,500 

Departmental internal users in Washington, D.C., and 

10 regional offices throughout the United States, as well 

as 39,600 external users. In FY 2018, the Department 

conducted an annual risk assessment of EDCAPS and 

tested 92 IT security controls, out of a baseline of 630 

IT security controls. EDCAPS is composed of five main 

linked components: 

 Financial Management Support System (FMSS),

 Contracts and Purchasing Support System (CPSS),
20 FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

 100 percent of Department users completed the 

annual computer security and privacy awareness 

training course in FY 2018. The Department 

strictly enforced compliance with annual security 

and privacy awareness training requirements, and 

disabled network accounts for noncompliant users. In 

addition, the Department won the Security Awareness 

Training Scenario category in the Federal Information 

Systems Security Educators Association’s Annual 

Security Awareness, Training, and Education Contest. 

 In January of 2018, OCIO undertook an effort to 

reshape the Department’s cybersecurity policy and 

guidance. A new information security instruction and 

standards framework was developed to allow for 

the following:

 Flexibility

 Alignment with the Framework for Improving 

Critical Infrastructure Cybersecurity in 

coordination with M-17-25

 Alignment with the current budgeting and risk 

reporting structures

 Support for outcomes sensitive to the 

OCIO objectives

 Responsiveness to the risk environment

 Reduction in review and approval timelines

 Workflow automation

ANALYSIS OF LEGAL COMPLIANCE

The Department identified two instances of 

noncompliance with laws and regulations in FY 2018. 

Additionally, reviews and assessments conducted pursuant 

to information technology-related laws and regulations 

identified challenges still facing the Department. 

Federal Information Security Modernization 

Act of 2014

The Federal Information Security Modernization Act of 

2014 (FISMA) requires federal agencies to develop, 

document, and implement an agency-wide program to 

provide security for the information and information 

systems that support the operations and assets of the 

agency and ensure the confidentiality, integrity, and 

availability of system-related information.

The Department’s and FSA’s information security 

programs completed a number of significant activities 

in FY 2017 and FY 2018 to improve cybersecurity 

capabilities and functions, some of which included:

 In August of 2017, OCIO began publishing 

monthly ED Cyber Security Framework (CSF) Risk 

Scorecards. The CSF Risk Scorecard is published 

as part of ED’s Information Security Continuous 

Monitoring (ISCM) efforts to identify cybersecurity 

risks, issues, and opportunities for improvements 

in our cybersecurity protections. The ED CSF Risk 

Scorecard is a detailed analysis tool for Authorizing 

Officials, Information System Owners, and 

Information System Security Officers to:

 Describe the current cybersecurity posture; 

 Describe a target state for cybersecurity; 

 Identify and prioritize opportunities for 

improvement within the context of a continuous 

and repeatable process; 

 Assess progress toward the target state; and

 Communicate among internal and external 

stakeholders about cybersecurity opportunities 

and risks.

 The Department has also continued to 

strengthen its partnership with the Department 

of Homeland Security to deploy Continuous 

Diagnostics and Mitigation capabilities and 

strengthen the Department’s ISCM program.
FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION 21

MANAGEMENT’S DISCUSSION AND ANALYSIS

101, 128 Stat. 1146, amended Section 3716(c)(6) of the 

DCIA to require referral of delinquent debt to Treasury’s 

Offset Program within 120 days. 

Due to unique program requirements of the Higher 

Education Act of 1965 (HEA), the Department requested 

guidance from Treasury’s Bureau of Fiscal Service, Office 

of General Counsel for the application of this revised 

DCIA requirement to Title IV debt. Treasury provided 

its interpretation of this requirement for Title IV debt 

in July 2015. Per Treasury’s interpretation, compliance 

for Title IV debt requires that the Title IV debt be: 1) 

in technical default (i.e., 271 days delinquent per Title 

IV aging) and 2) a receivable of the federal government. 

Therefore, the DCIA Treasury Offset Program referral 

requirement for Title IV debt owned by FSA at the time 

of delinquency is 271 days delinquent and for debt 

acquired via a FFEL guarantee default claim or default 

Perkins Loan assignment is 120 days delinquent (per 

DCIA aging which begins upon acceptance of a defaulted 

debt). As of September 30, 2018, the Department and 

FSA were not in compliance with the DCIA Treasury 

Offset Program referral requirement for Title IV debt as 

interpreted by Treasury because FSA had not yet revised 

its loan servicing systems, procedures, and internal 

processes in response to this interpretation. During FY 

2018, FSA continued to implement changes to its default 

loan servicing system and business process for referring 

eligible debts to the Treasury Offset Program sooner. 

In addition, FSA provided guidance to the Guaranty 

Agencies that will facilitate sending debts to Treasury 

sooner. FSA anticipates this first round of changes will 

be implemented during FY 2019. Afterwards, FSA will 

a) revise its compliance reporting procedures to enable 

FSA to establish a new DCIA compliance baseline and 

b) analyze the remaining compliance gap to determine 

next steps. This area of noncompliance is noted in the 

independent auditors’ report, exhibit C.

This determination of noncompliance with the 

DCIA does not represent a material weakness in the 

Department’s internal controls.

Improper Payments Information Act of 2002

The Improper Payments Information Act of 2002 (IPIA), 

Pub. L. 107-300, 116 Stat. 2350, as amended by 

the Improper Payments Elimination and Recovery Act 

of 2010 (IPERA), Pub. L. 111-204, 124 Stat. 2224, 

and the Improper Payments Elimination and Recovery 

Improvement Act of 2012 (IPERIA), Pub. L. 112-248, 

126 Stat. 2390, requires federal agencies to report 

improper payments annually for programs that are 

deemed susceptible to significant improper payments. 

IPERA also requires each agency’s OIG to review the 

agency’s improper payment reporting in its AFR and 

accompanying materials, and to determine whether the 

agency has met six compliance requirements.

In its annual improper payment compliance audit for 

FY 2017, the OIG concluded that the Department was 

not compliant with IPERA because it did not meet one 

of IPERA’s six compliance requirements for the Pell 

Grant (Pell) program. The Department reported an 

improper payment rate for the Pell program that did 

not meet the prior year published reduction target. The 

Department met all six IPERA compliance requirements 

for the Direct Loan program. For FY 2018, the improper 

payment rates for the Pell and Direct Loan programs met 

the prior-year published reduction targets.

This determination of noncompliance with IPERA does 

not represent a material weakness in the Department’s 

internal controls. The Department’s current nonstatistical 

estimation methodology limits the ability to establish 

accurate out-year reduction targets. To address this 

issue, the Department coordinated with OMB and 

other stakeholders in 2018 to develop a statisticallyvalid methodology that will be implemented in 2019 

to estimate improper payments for the Pell Grant and 

Direct Loan programs. This new methodology will 

improve the accuracy of the Department’s improper 

payment estimates and the Department’s ability to set 

and meet reduction targets. 

Debt Collection Improvement Act of 1996

The Debt Collection Improvement Act of 1996 (DCIA), 

Pub. L. 104-134, 110 Stat. 1321-358, was enacted into 

law as part of the Omnibus Consolidated Rescissions and 

Appropriations Act of 1996, Pub. L. 104-134, 110 Stat. 

1321. The primary purpose of the DCIA is to increase 

the collection of nontax debts owed to the federal 

government. Additionally, the DATA Act, Pub. L. 113-
22 FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

FORWARD-LOOKING INFORMATION

This section summarizes information pertinent to the 

Department’s future progress and success.

Enterprise Risk Management

The Department is focused on improving enterprise 

risk management (ERM) to maximize the Department’s 

value to students and taxpayers through achievement 

of the Department’s strategic goals and objectives. The 

Department’s implementation of ERM includes three 

critical strategies that are more fully described under 

Strategic Objective 4.2, Identify, assess, monitor and 

manage enterprise risks:

1. Creating a risk-aware culture that includes transparent 

discussions of risks.

2. Implementing an ERM framework and capability 

that leverages existing risk management activities and 

governance bodies.

3. Managing risks in a more coordinated and 

strategic manner.

Beginning in FY 2019, when the ERM framework is 

fully implemented, the Department plans to include risk 

information as a central consideration in all critical dayto-day and strategic decision-making activities, including 

resource allocations. In FY 2018, the Department 

established a new governance structure for ERM and 

focused on building a top-down understanding of and 

commitment to managing risk more effectively across the 

organization. Under the new governance structure, senior 

leaders from all offices will participate in establishing and 

implementing enterprise-wide risk management strategies to 

promote strategic risk-taking and coordinated approaches to 

managing cross-cutting management challenges.

While the Department continues working to mature its 

ERM capability and develop a more complete portfolio 

of risks to inform decision-making at all levels of the 

organization, the Senior Management Council has 

focused on providing strategic direction to effectively 

manage its most significant risks. The risks summarized 

below are several of the most significant challenges and 

opportunities facing the Department that will continue 

to receive management priority in FY 2019 and beyond.

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. The following is a 

discussion of (1) the steps the Department has taken to 

help make student debt more 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, some students 

leave school poorly equipped to manage their 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.

Recent trends in student loan repayment data show that:

 More than 80 percent of Direct Loan recipients with 

loans actively in repayment are current on their loans.

 As of June 2018, nearly 7.1 million Direct Loan 

recipients were enrolled in income-driven repayment 

plans, representing a 13 percent increase from June 

2017 and a 34 percent increase from June 2016.

The Department continues to work relentlessly to make 

student debt more manageable. Looking to the future, 

the Department will:

 Continue conducting outreach efforts to inform 

student loan borrowers of their repayment options.

 Work to improve customer service and student aid 

systems and processes by implementing FSA’s Next 

Generation Financial Services Environment 

(Next Gen FSA).
FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION 23

MANAGEMENT’S DISCUSSION AND ANALYSIS

repayment plans are available on the Department’s 

website. 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.

Data on approved PSLF applications first became 

available in FY 2018, since borrowers first became 

eligible for PSLF starting October 1, 2017. As of 

September 30, 2018, the total number of borrowers 

who received forgiveness totaled 206. The value of 

this forgiveness totaled $12.32 million. Despite the 

relatively modest figures of approved applications to 

date, the number of borrowers who have certified 

their employment in a public service organization 

continues to increase. As of September 30, 2018, 

the number of borrowers with certified employment 

totaled 936,029. The low number of approved PSLF 

applications in relation to employment certifications 

may be partially due to the complicated nature of 

the program, in particular the determination of what 

constitutes a qualifying payment. Many borrowers who 

file employment certification forms early in their careers 

may also move into private sector employment before 

reaching the 10 years and thus may (a) never apply for 

forgiveness or (b) apply for forgiveness much later, after 

returning to public service work. In the Consolidated 

Appropriations Act, FY 2018, Congress provided $350 

million in funding to forgive up to $500 million in 

loan balances which were ineligible for immediate 

PSLF solely due to having made a payment under a 

nonqualifying repayment plan. Future congressional 

action that may affect eligibility for PSLF will continue 

to be an area of uncertainty. Lastly, 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.

 Continue 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 inherent 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 

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 (IDR) plans have been introduced in 

recent years, including Income-Based Repayment, Pay 

as You Earn (PAYE), and Revised Pay As You Earn. IDR 

plans tend to be more costly to the government than 

non-IDR plans; for the 2018 loan cohort, it is estimated 

that the government will recover 29 percent less for 

loans in income-driven repayment plans as compared to 

loans in standard plans. It is important to be careful in 

making such comparisons, however, as the underlying 

characteristics of borrowers selecting plans (and the 

corresponding dynamics of behavior driving selection 

in plans) also plays a role in driving the cost of loans 

enrolled in specific plans. In general, the proliferation 

of IDR 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 
24 FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

since a re-estimate worth 1 percent of the portfolio today 

would be more than three times as large as a similar reestimate in FY 2011 ($11.2 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. 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 cohort default 

rate for students was at a high of 14.7 percent for loans 

entering repayment in 2010, while the most recent rate 

is 10.8 percent for loans entering repayment in 2015. 

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 transfer automatically a 

family’s tax information to both student aid applications 

and IDR plan applications was taken down due to 

Total and Permanent Disability: The Tax Cut and Jobs 

Act of 2017, signed into law on December 22, 2017, 

exempted the discharge of student loans due to total 

and permanent disability (TPD) from taxable income. 

TPD discharges had previously been considered taxable 

income. However, loan amounts discharged due to 

TPD may continue to be considered taxable income for 

state tax purposes. On April 16, 2018, the Department 

of Education announced that it would start matching 

records from the Department’s National Student Loan 

Data System with Department of Veterans Affairs 

systems, in order to expedite the processing of total and 

permanent disability discharges. Borrowers matched 

through this process will be mailed a customized letter 

that will explain eligibility for loan discharge and include 

a TPD application. The borrower can sign and return 

the application to complete the process of applying for 

a TPD discharge. The individual effects of each of these 

changes, as well as the potential interaction between 

them, will remain an area of uncertainty until enough 

actual data can be observed to analyze their impact. 

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 

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 approximately $382 billion 

in FY 2011 to around $1.2 trillion as of the end of FY 

2018. This growth naturally results in larger re-estimates, 
FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION 25

MANAGEMENT’S DISCUSSION AND ANALYSIS

and inefficiencies result in higher administrative costs and 

hinder effective oversight.

Next Gen FSA Environment

Multiple websites, mobile applications, contact centers, 

and other customer interfaces will be combined into a 

simplified, consistent, and engaging experience, which 

will be enhanced by standardized training and tools 

across vendors and partners. With a focus on mobile 

engagement, Next Gen FSA will meet customers where 

they are, letting them connect with FSA on the device of 

their choice. Customers will access a modernized, online 

portal with personalized information that helps them 

quickly understand their options and make informed 

decisions throughout the financial aid life cycle, including 

borrowing and loan repayment. While Next Gen FSA will 

cut through the information clutter and provide robust 

self-service, it also will seamlessly connect customers with 

additional support when needed. 

In addition to an improved customer experience, Next 

Gen FSA will completely modernize FSA’s back-end 

systems and infrastructure. This transformation will 

pave the way for improved processing and customer 

management at lower costs. Vendor and partner 

performance standards and accountability measures 

will be built into Next Gen FSA to ensure customers 

receive world-class service while protecting taxpayer 

dollars. Next Gen FSA will integrate state-of-the-art 

cybersecurity protections across every aspect of the 

student aid experience. Enterprise-wide data analytics 

will drive improved customer service, particularly for 

at-risk students and borrowers, while also enhancing 

our oversight of participating postsecondary schools and 

supporting vendors.

Solicitation and Procurement Process

The Next Gen FSA implementation plan was based, in 

part, on extensive market research with more than 60 

industry leaders. This research-based approach enabled 

FSA to identify best-in-industry standards and technical 

benchmarks that continue to inform the procurement 

process. On February 20, 2018, FSA initiated a 

multistage procurement process designed to identify the 

vendors most capable of supporting the implementation 

of Next Gen FSA; FSA intends to select a pool of 

vendors to deliver the Next Gen FSA environment. 

The Department anticipates awards will be made with 

the goal of new systems and processes coming online 

beginning in FY 2019. The current Title IV Additional 

Servicing (TIVAS) and Not-for-Profit (NFP) indefinitesecurity 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.

NEXT GEN FSA

About FSA

As the nation’s largest provider of financial aid for 

education beyond high school, FSA delivers more than 

$120 billion in aid each year to students and their 

families. Through programs authorized under the Higher 

Education Act of 1965, as amended, FSA provides grants, 

loans, and work-study funds for college or career school. 

FSA also oversees the approximately 6,000 postsecondary 

institutions that participate in the federal student aid 

programs. In every interaction with students and their 

families, FSA strives to be the most trusted and reliable 

source of student financial aid information and services 

in the nation.

The Vision

FSA has one of the largest consumer loan portfolios in 

the country at $1.4 trillion.1

 It is critical that we provide 

a customer experience that is on par with world-class 

financial services firms and to establish our organization as 

one of the most trusted brands in the student aid industry. 

The Next Generation Financial Services Environment 

(Next Gen FSA) will enable FSA to realize this vision by 

modernizing the way we connect with our customers, 

while streamlining our student aid systems and processes. 

This broad effort will deliver an exceptional customer 

experience for millions of Americans across the entire 

student aid life cycle, from fostering greater awareness 

about the availability of financial aid, to applying for aid, 

to repaying loans.

Today’s Environment

In the current federal financial aid process, students 

and families must negotiate a complex and fragmented 

landscape, interacting with multiple systems, vendors, 

processes, and interfaces across a multitude of brands 

and user experiences. Too often, this poor customer 

experience creates confusion, resulting in borrowers 

failing to understand their repayment options and the 

financial implications of their student debt, borrower 

indifference, and, ultimately, higher loan delinquency 

and default rates. Additionally, operational complexities 

1

 This includes FFEL Lender held loans.
26 FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

will incorporate the Department’s entire IT budget of 

approximately $750 million, as well as the ability to use 

the Apptio Benchmarking, Business Insights, and Bill of 

IT modules. These modules will allow the Department 

to benchmark costs between the different program offices 

at ED, as well as between different federal agencies. 

The Business Insights and Bill of IT modules will offer 

additional details regarding total costs for IT projects 

at the Department as well as allow more analysis of our 

vendors and business practices when it comes to IT.

The objective is to implement an integrated solution that 

will allow OCIO to:

 Accurately account for and categorize IT spending in 

IT Cost Towers and Pools.

 Evaluate IT spending using a method that helps 

identify redundant IT assets (e.g. systems, 

applications, and licenses).

 Extract cost elements from disparate sources, analyze 

these elements, and report cost stressors and trends 

to stakeholders.

 Report IT spending in IT Towers and Cost Pools to 

OMB for capital planning. Prepare accurate pricing to 

client offices for the services provided.

Shared Services

The Department of Education uses shared services 

where feasible and practical, including payroll services 

with Department of the Interior and travel services 

with Carlson Wagonlit. The Department is exploring 

shared service and commercial off-the-shelf offerings to 

replace its G5, and its contracts and purchasing system 

(Comprizon). Additionally, the Department will explore 

migrating its financial management system to a shared 

service once the current upgrade from Oracle Enterprise 

Business Suite R11i to R12 is completed and stabilized. 

We will continue to explore other options to further 

leverage shared services for other mission support areas in 

the coming years.

delivery, indefinite-quantity (IDIQ) contracts are set to 

expire in June and September 2019, respectively. Should 

FSA require continued servicing support beyond these 

dates, there are multiple options it can pursue. For 

example, one option would be to issue a new task order 

prior to the expiration of the underlying IDIQ contract 

to one or more of the current servicers. Another option 

would be to extend the underlying IDIQ contract up to 

6 months in accordance with FAR 52.217-8, then issue 

new task orders. The appropriate contractual actions will 

be taken to ensure continued servicing capabilities until 

this portion of the Next Gen FSA vision is implemented.

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. Implementing 

Technology Business Management Solutions and 

exploring the expanded use of Shared Services are two of 

the Department’s key initiatives.

Technology Business Management Solutions 

(TBMS) 

The purpose of the TBMS project is to provide an 

integrated solution that will support the Office of 

the Chief Information Officer (OCIO)’s role in 

implementing an Information Technology (IT) cost 

transparency capability. The TBMS project will also 

allow OCIO to communicate IT value with senior 

leadership, improve the efficiency and predictability 

of capital planning, and optimize IT costs. In the FY 

2019 IT Budget-Capital Planning Guidance, the Office 

of Management and Budget requires agencies to begin 

reporting IT spending in alignment with the TBM 

Framework. The new requirements include using Cost 

Pools and IT Towers to classify IT spending. The project 

consists of two phases. The first phase will include 

OCIO’s operating budget of approximately $120 million 

into the TBM Cost Transparency tool provided by the 

Department’s TBM Vendor, Apptio. The second phase