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