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%