MANAGEMENT’S DISCUSSION AND ANALYSIS 

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

Forward-Looking Information 

This section summarizes information pertinent to the Department’s future progress and success. 

Direct Loan Program 

The Department’s largest program, the William D. Ford Federal Direct Loan (Direct Loan) 

program, provides students and their families with funds to help meet postsecondary education 

costs. Easing the burden of student loan debt is a significant priority for the Department. The 

following is a discussion of (1) the steps the Department has taken to ensure that student debt 

is manageable and (2) the risks inherent in estimating the cost of the program. 

Managing Student Loan Debt 

Each year, federal student loans help millions of Americans obtain a college education—an 

investment that, on average, has high returns. While the average returns to a college degree 

remain high, substantial inequities in outcomes exist, and some students leave school poorly 

equipped to manage their debt, whether due to limited labor market opportunities or high debt. 

Traditionally, federal loans of this type have had flat 10-year repayment schedules, making it 

difficult for borrowers to pay at the start of their career when their salaries are lower. The recent 

introduction and expansion of the Pay As You Earn (PAYE) and related income-driven 

repayment plans grant students the opportunity for greater financial flexibility as it pertains to 

their monthly payment. For more details on these plans, visit FSA’s How to Repay Your Loans 

Portal.

As the labor market declined during the financial crisis of 2008, serious challenges in student 

debt repayment came to the forefront of conversations. The availability of income-driven 

repayment plans like PAYE and an improving labor market has led to substantial improvement, 

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

innovate loan program guidelines in order to make student loan debt more manageable for 

borrowers across the board. Recent trends in student loan repayment data show that 

 More than 80 percent of Direct Loan recipients with loans in repayment are current on their 

loans. 

 Growing numbers of borrowers are taking action and responsibility with regard to their 

student loans when they are in need of modifications and support. More than five million 

Direct Loan borrowers have enrolled in PAYE and income-driven repayment options, a 

substantial increase from the same figure from 2011—an enrollment of 700,000 borrowers. 

 Cohort default rates for the most recent cohort of Direct Loan borrowers to enter repayment 

have declined for the third straight year. 

The Department has made progress in this area and continues to work relentlessly to make 

student debt more manageable. Looking to the future, the Department will build on its recent 

successes by: 

 Conducting significant outreach efforts to inform student loan borrowers of their repayment 

options, including the protections provided by income-driven repayment plans. The 

Department has announced a goal of enrolling two million more borrowers in plans like 

PAYE during the next year. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

FY 2016 Agency Financial Report—U.S. Department of Education 17

 Reinventing customer service to ensure that borrowers have access to an affordable 

repayment plan, high-quality customer service, reliable information, and fair treatment. 

 Continuing to support additional tools like the College Scorecard and Financial Aid Shopping 

Sheet to increase transparency around higher education costs and outcomes, in an effort to 

help students and families make informed decisions before college enrollment. 

 Further protecting student borrowers and taxpayers against predatory practices by 

postsecondary institutions with recently issued Borrower Defense regulations. These 

regulations clarify and simplify existing regulations that grant students loan forgiveness if 

they were defrauded or deceived by an institution of higher education or technical training. 

 Launching an experiment to test the effectiveness of new types of, and more frequent, loan 

counseling for student borrowers. The experiment will test whether requiring additional loan 

counseling is effective in boosting academic outcomes and helping students manage their 

debt. 

Managing Risks and Uncertainty Facing the Direct Loan Program 

Direct Loan program costs are estimated consistent with the terms 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 three 

types of risk that make estimating lifetime program costs a difficult task. 

Legislative, Regulatory, and Policy Risk 

There are inherent risks from the possibility that the cost structure of the Direct Loan program 

may be altered through legislative, regulatory, or administrative action. In addition, even 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 income-driven repayment plans have been 

introduced in recent years, including Income-Based Repayment, PAYE, and Revised Pay As 

You Earn. In general, the proliferation of plans has made income-driven repayment terms more 

generous and made the plans available to a greater number of borrowers. The Department has 

also engaged in an outreach campaign to broaden borrower awareness of these plans. These 

trends have affected recent cost re-estimation significantly through changing the absolute cost 

of the plans as well as increasing participation in the plans. 

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 not-for-profit organization). There is still uncertainty as to how many borrowers 

will take advantage of the program. Much of this uncertainty arises because borrowers do not 

need to apply for the program until after having made the 120 qualifying monthly payments. 

While data on current applications is helpful to gauge potential forgiveness, it may not be 

representative of final participation figures. In addition, since the first date by which a borrower 

could receive forgiveness under this program is October 1, 2017, the Department does not yet 

have a robust set of actual forgiveness data. The available data on borrowers who have already 

certified their employment, nearly 500,000 borrowers as of September 2016, is less valuable 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

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

than it appears since it does not track breaks in their repayment or qualifying employment. The 

Department continues to remain informed on and manage the risk that may arise in relation to 

uncertainty about the effect of further borrower outreach on boosting participation in the PSLF 

program. 

Borrower Defense: In May 2015, Corinthian Colleges, Inc. (Corinthian), a publicly traded 

company operating numerous postsecondary schools that enrolled over 70,000 students at 

more than 100 campuses nationwide, filed for bankruptcy under deteriorating financial 

conditions and while subject to multiple state and federal investigations. The Department 

received thousands of claims for student loan relief from Corinthian students under a provision 

in the Higher Education Act of 1965 (HEA) referred to as “borrower defense.” In August 2015, 

the Department initiated a rule-making process to establish a more accessible and consistent 

borrower defense standard to clarify and streamline the borrower defense process to protect 

borrowers. Since Corinthian, several other postsecondary schools have closed under similar 

circumstances, including ITT Technical Institute. The overall financial impact of activity that 

could lead to valid borrower defense claims, particularly in the for-profit postsecondary sector, 

coupled with the impact of the recently issued Borrower Defense regulations, is an area of 

uncertainty. The Department continues to monitor instances of this risk factor to its programs. 

Estimation Risk 

Actual student loan outcomes may deviate from estimated student loan outcomes, which is not 

unexpected given the long projection window of 40 years. The complexity of the Direct Loan 

program, as exemplified by the multitude of available projection paths and possible outcomes, 

results in inherent uncertainty. For example, estimates that need to be made for loans 

originating in FY 2016 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, 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 incomedriven repayment, what the borrower’s employment (public sector or not) and income and family 

status will be over the next 25 years. These estimates are not only extremely difficult to make 

but are subject to change if future student behaviors deviate from past experience. Lastly, the 

Direct student loan portfolio has grown from around $380 billion in FY 2011 to around $960

billion as of the end of FY 2016. This growth naturally results in increased re-estimates, since a 

re-estimate worth 1 percent of the portfolio today would be more than twice as large as a similar 

re-estimate in FY 2011 ($9.6 billion vs. $3.8 billion).

Macroeconomic Risk 

There is inherent risk due to the long-term nature of the subsidy estimates, as well as the 

underlying uncertainty in projecting macroeconomic variables many years into the future. Some 

examples include the following: 

Interest Rates: Direct Loan subsidy estimates are very sensitive to changes in interest rates. 

Recent interest rate history has been anomalous, as interest rates have continued to remain 

lower than their historical averages. Future interest rate “shocks” could result in actual subsidy 

costs that deviate from estimated subsidy costs. 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. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

FY 2016 Agency Financial Report—U.S. Department of Education 19

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, 

default rates for students in two-year schools, which were at a low of 4.6 percent, for loans 

entering repayment in 2005, began an upward trend reaching as high as 10.0 percent for loans 

entering repayment in 2011. While recessions and economic downturns are cyclical 

phenomena, their exact timing and impact on the subsidy 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 subsidy costs of income-driven repayment plans may deviate 

from projected subsidy 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. 

Continuous Improvement 

Improving critical infrastructure, systems, and overall capacity and ensuring sound strategic 

decision making regarding allocation of resources are essential to the Department’s future 

progress and success. Exploring the use of shared services and incorporating enterprise risk 

management are two of the Department’s key initiatives.

Shared Services 

In alignment with OMB Memorandum M-13-08 and the Office of Financial Innovation and 

Transformation’s Federal Agency Modernization Evaluation framework, the Department and 

Treasury’s Administrative Resource Center (ARC) explored ARC’s existing core financial 

management system and its ability to meet the Department’s modernization requirements. 

During FY 2016, the Department and ARC collaboratively delivered a high-level Readiness 

Assessment Report on migration to ARC’s solution set. Beginning in FY 2017, the Department 

and ARC will restart discussions at a more detailed level regarding the Department using ARC’s

Shared Service solution set for its core financial system. 

Enterprise Risk Management 

The Department recently established an Enterprise Risk Management Council. The purpose of 

the council is to promote effective mission achievement by incorporating enterprise risk 

management into the basic fabric of how the Department conducts strategic decision making 

and allocates resources. The council serves as the primary governance structure and 

coordination point for enterprise-level direction setting with regard to risk management as 

required by OMB Circular A-123, Management’s Responsibility for Enterprise Risk Management 

and Internal Control. In FY 2017, the council will oversee the development of a risk profile and 

work to increase the consistency and integration of risk management practices across the 

Department.