FY 2019 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION 9

MANAGEMENT’S DISCUSSION AND ANALYSIS

FINANCIAL HIGHLIGHTS

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 18 

consecutive years, the Department has earned an unmodified 

(or “clean”) audit opinion. The financial statements and 

notes for FY 2019 are on pages 32–72 and the Independent 

Auditors’ Report begins on page 82.

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 $1,310.7 billion as of 

September 30, 2019. The vast majority of the assets 

relate to credit program receivables, $1,203.5 billion, 

which comprised 91.8 percent of all assets. Direct Loans 

comprise the largest share of these receivables. All other 

assets totaled $107.2 billion, most of which was Fund 

Balance with Treasury.

The Department’s liabilities totaled $1,314.2 billion as 

of September 30, 2019. 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 $1,192.1 

billion as of September 30, 2019.
10 FY 2019 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

value of direct loans (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 

Figure 3 shows the changes in the Direct Loan receivables 

components over the past five years. The principal 

amount has continued to grow as the Direct Loan 

program has originated all new federal loans since 

July 2010, when originations of new Federal Family 

Education Loan (FFEL) loans ended. However, the 

rate of increase in principal has slowed, as the Direct 

Loan program has disbursed decreased amounts of new 

loans each year since FY 2015 as a result of stagnant 

and in some cases declining enrollment, while accrued 

interest amounts have increased as more loans have 

moved into active repayment statuses. 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 

Direct Loan 

Component

(Dollars

 in Billions)

Fiscal Year

2015 2016 2017 2018 2019

Principal $ 800.8 $ 902.8 $ 998.8 $ 1,083.7 $ 1,164.9

Rate of 

Increase in 

Principal

15.4% 12.7% 10.6% 8.5% 7.5%

Accrued Interest $ 44.3 $ 50.8 $ 59.5 $ 72.0 $ 83.3

Allowance for 

Subsidy $ 35.5 $ 5.3 $ (16.8) $ (40.7) $ (124.4)

Total No. of 

Direct Loan 

Recipients 

(in Millions)

29.9 31.5 33.0 34.2 35.1

Loan Status

Fiscal Year

2015 2016 2017 2018 2019

Total No. of 

Direct Loan 

Recipients 

(in Millions)

29.9 31.5 33.0 34.2 35.1

Total Dollar 

Amount of 

Direct Loans 

Outstanding

$ 845.1 $ 953.6 $ 1,058.4 $ 1,155.7 $ 1,248.1 

Current 

Repayment1 332.0 406.8 467.9 531.4 594.7

% Current

Repayment 39.3% 42.7% 44.2% 46.0% 47.6%

In School, 

Grace Period, 

and Education 

Deferments

284.3 289.6 291.7 291.7 294.8

% In School, 

Grace Period, 

and Education 

Deferments

33.6% 30.4% 27.6% 25.2% 23.6%

Forbearance 

and 

Noneducation 

Deferments

103.0 106.5 122.5 121.9 133.2

% Forbearance 

and 

Noneducation 

Deferments

12.2% 11.2% 11.6% 10.5% 10.7%

Delinquent 

(Past Due

31-360 Days)

65.1 71.8 79.5 92.2 90.8

% Delinquent 

(Past Due

31-360 Days)

7.7% 7.5% 7.5% 8.0% 7.3%

Default/

Bankruptcy/

Other

60.7 78.9 96.8 118.5 134.6

% Default/

Bankruptcy/

Other

7.2% 8.2% 9.1% 10.3% 10.8%

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 2019 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION 11

MANAGEMENT’S DISCUSSION AND ANALYSIS

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 39 percent in FY 

2015 to 48 percent in FY 2019, 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. A diagram depicting the Direct Loan 

program financing process is displayed with related trend 

data as Figure 6 on page 12 of this report.

STATEMENTS OF NET COST

The consolidated statements of net cost report the 

Department’s components of the net cost of operations for 

a given 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. 

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 2015 is due primarily to higher subsidy costs, 

the main cause being high participation in income-driven 

repayment (IDR) 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.

Participation in IDR plans has increased as (a) new plans 

have become available that are more advantageous to 

borrowers, (b) new 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. 

Table 1 shows the payment status of the Direct Loan 

principal and interest balances outstanding over the past five 

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 IDR plans. 

Loans in the Delinquent category are past due anywhere 

from 31 to 360 days. 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 
12 FY 2019 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 2015 2016 2017 2018 2019 

Net Borrowing 90.9 84.4 67.3 89.1 41.5 

 Borrowing from Treasury 159.7 147.0 160.5 155.3 137.6 

 Debt Repayments to Treasury (68.7) (62.6) (93.2) (66.2) (96.1)

Interest Expense to Treasury (27.6) (30.5) (31.3) (32.3) (33.8)

Interest Earned from Treasury 4.2 3.9 4.3 3.9 4.1 

Cumulative Taxpayer Cost / (Savings) (35.5) (5.3) 16.8 40.7 124.4 

Current Subsidy Expense (Revenue) (0.9) 16.1 5.3 4.4 61.5 

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

Fiscal Year 2015 2016 2017 2018 2019 

Loan Disbursements 142.2 140.5 142.5 134.1 130.7 

 Stafford Subsidized 24.0 23.8 23.4 20.3 20.0 

 Stafford Unsubsidized 52.7 52.3 51.4 49.0 48.1 

 PLUS 19.2 19.0 18.7 23.1 22.7 

 Consolidation1 46.4 45.5 49.0 41.6 39.8 

Loan Collections2 65.1 73.2 82.0 84.9 91.3 

 Principal 50.0 55.9 62.6 63.5 67.0 

 Interest 13.4 15.5 17.6 19.5 22.4 

 Fees 1.8 1.8 1.9 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 FFEL program, in addition to Direct Loans. 

2 Loan collections include prepayments, including prepayments in full due to consolidation of underlying Direct Loans.
FY 2019 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION 13

MANAGEMENT’S DISCUSSION AND ANALYSIS

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. The increase 

in the subsidy expense for Direct Loans in FY 2019 

accounts for 75.4 percent of the total increase in the 

Department’s gross costs from FY 2018. 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.

GROSS COSTS AND EXCHANGE REVENUE BY TYPE 

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). 

2015 2016 2017 2018 2019

Subsidy Expense for 

New Loans Disbursed 

in the Current Year

$ (6.2) $ (5.7) $ (2.6) $ (3.1) $ (3.0)

Subsidy 

Re-estimates (4.6) 21.8 7.9 7.4 64.5 

Loan Modification 9.9 - - 0.1 - 

Total Subsidy Expense $ (0.9) $ 16.1 $ 5.3 $ 4.4 $ 61.5 
14 FY 2019 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

 Maturity, Prepayment, and Loan Payoff. The 

Department further enhanced the forecasting 

of amount of debt distributions and aligned all 

three sub-components of this assumption to enter 

repayment cohorts. The loan payoff component was 

improved as well by using a more precise method 

to estimate payoff for loans enrolled in graduated 

repayment plans. As mentioned above, the impact 

on repayment of delinquency was moved to the 

payoff maturity assumption to better reflect interest 

accrual and the extension of the payment period. 

These adjustments resulted in longer assumed terms, 

resulting in a longer stream of payments, more 

interest accrual and less subsidy. The combined effect 

of these changes led to a net downward re-estimate of 

$26.1 billion.

 Financing Account Interest Adjustment. Beginning 

in FY 2019, the Department implemented a process 

to calculate and execute a financing account interest 

adjustment to address differences between net 

financing account interest executed for cohorts each 

year and amounts earned based on final Treasury 

interest rates for those cohorts. This resulted in a net 

upward re-estimate of $6.3 billion.

 Default. The Department updated the data and made 

a change in methodology to a weighted fractional 

logit in order to more appropriately reflect the 

different sizes of the grouped data. The combined 

effect of these changes led to a net downward reestimate of $1.0 billion. 

 Collections. As a result of analyzing updated Debt 

Management and Collection System (DMCS) data, 

collection rate estimates were revised which resulted 

in a net upward re-estimate of $4.2 billion.

 2018 Cohort Assumption Changes. The technical 

re-estimate cannot reflect the impacts of certain 

assumption changes applicable to the current year 

loan cohort until the following fiscal year per OMB 

guidance. The current year’s re-estimate includes a net 

upward adjustment of $5.8 billion for these prior year 

changes attributable to the FY 2018 cohort. 

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 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.

The Direct Loan program subsidy re-estimate increased 

subsidy expense in FY 2019 by $64.5 billion. Re-estimated 

costs only include cohorts that are 90 percent disbursed; 

cohort years 1994–2018. The re-estimate reflects the 

assumption updates and other changes described below. 

 IDR Model Changes. During FY 2019, the 

Department enhanced the IDR model by examining 

the most current available IDR application data 

from NSLDS to supplement information previously 

used from the Department of Treasury’s Office of 

Tax Analysis, in order to calibrate projected incomes. 

The Department’s analysis determined a downward 

calibration was warranted, with the Departmental and 

FSA senior management concurrence. The impact of 

this calibration was the most significant factor in the 

IDR component of the re-estimate. The IDR update 

also reflects further refinement in the logic for switching 

borrowers among IDR plans and the appropriate balance 

to be paid off when they do switch. These updates led to 

a net upward re-estimate of $43.6 billion. 

 Deferment and Forbearance. The Department made 

enhancements in the methodology for delinquency, 

to more precisely reflect interest accrual and the 

extension of the payment period than the method 

previously employed. These enhancements resulted 

in a lower rate of forbearance which led to an upward 

re-estimate of subsidy as less interest is accrued, 

capitalized, and collected. Deferment rates increased 

for PLUS loans eligible for in-school deferments. 

The combined effect of these changes, in addition 

to updated data from NSLDS, was a net upward reestimate of $18.3 billion.
FY 2019 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION 15

MANAGEMENT’S DISCUSSION AND ANALYSIS

$16.3

  $26.$16.7

 Interest on the Re-estimate. Interest on re-estimates 

is the amount of interest that would have been earned 

or paid by each cohort on the subsidy re-estimate, if 

the re-estimated subsidy had been included as part of 

the original subsidy estimate. The interest on the reestimate calculated on the overall subsidy re-estimate 

resulted in a net upward re-estimate of $9.7 billion.

 Interactive Effects. The re-estimate includes a net 

upward re-estimate of $3.2 billion attributed to 

the interactive effects of the assumption changes 

described above.

The Department has more than 100 grant and loan 

programs. The Department’s FY 2019 expenses for grant 

programs totaled $77.8 billion. The three largest grant 

program areas 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 fund to states to support educational services 

to children of migratory farmworkers and fishers, and 

to neglected or delinquent children and youth in Staterun 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.

In addition to student loans and grants, the Department 

offers other discretionary grants under a variety of 

authorizing legislation, with approximately 90 percent of 

non-student aid funds awarded by formula and 10 percent 

through competitive processes. 
16 FY 2019 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

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 $358.2 

billion for the period ended September 30, 2019, decreasing 

from $358.5 billion, or approximately 0.1 percent 

from the prior year. Budgetary resources are comprised 

of appropriated budgetary resources of $137.2 billion 

and non-budgetary credit reform resources of $221.0 

billion. The non-budgetary credit reform resources are 

predominantly borrowing authority for the loan programs. 

The Department’s gross outlays totaled $307.5 billion for 

the period ended September 30, 2019. 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 $150.8 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 

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.

Billions %

CREDIT PROGRAMS $ 226.8 73.8%

DIRECT LOAN PROGRAM 208.0 67.6%

FFEL PROGRAM 18.4 6.1%

OTHER CREDIT PROGRAMS FOR 

HIGHER EDUCATION 0.4 0.1%

GRANTS $ 76.9 25.0%

PELL GRANTS 29.0 9.4%

EDUCATION FOR 

THE DISADVANTAGED 16.2 5.3%

SPECIAL EDUCATION - INDIVIDUALS 

WITH DISABILITIES EDUCATION ACT 

(IDEA) GRANTS

 13.2 4.3%

ALL OTHER GRANTS 18.5 6.0%

CONTRACTUAL SERVICES $ 3.1 1.0%

PERSONNEL COMPENSATION 

AND BENEFITS $ 0.6 0.2%

OTHER $ 0.1 0.0%

TOTAL $ 307.5 100.0%