MANAGEMENT’S DISCUSSION AND ANALYSIS 

DRAFT 10/17/16

 

Management’s Discussion and Analysis
MANAGEMENT’S DISCUSSION AND ANALYSIS 

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

About the Management’s Discussion and Analysis

The U.S. Department of Education (the Department) continued to enhance the usefulness of the 

Fiscal Year (FY) 2016 Agency Financial Report (AFR) by augmenting the report with relevant 

web content. To take advantage of the numerous hyperlinks embedded in the report, the 

Department recommends reading it on the Internet. The Department’s intent is to provide users 

with access to helpful information about the Department and its financial and performance 

activities. To help continue to improve the content of the AFR, readers are encouraged to 

provide their feedback 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. 

The Department has demonstrated its commitment to fortifying the education system by 

directing federal resources to, among other things: improve access to early learning programs, 

reform elementary and secondary education to strengthen critical outcomes, make higher 

education more accessible and affordable, and work to attract talented people to the teaching 

profession. The Department also demonstrated good stewardship of federal resources by 

producing complete and accurate financial reports and ensuring that its business and financial 

management systems and processes are well controlled and managed. 

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, a map of 

its regional offices, and a link to the full list of Department offices with a description of selected 

offices by function. 

Discussion of Performance 

For the 8th year, the Department elected to produce separate financial and performance 

reports. The Agency Financial Report for FY 2016 provides a high-level description of 

performance measures and goals based on the FY 2014–18 Strategic Plan. A detailed 

discussion of performance information for FY 2016 will be provided in the Department’s Annual 

Performance Report to be released at the same time as the President’s FY 2018 Budget. The 

Department’s annual performance reports for prior years are available online at 

http://www2.ed.gov/about/reports/annual/index.html. 

The section includes an overview of performance reporting and a high-level discussion on the 

Department’s focus areas for FY 2016–17. The results achieved from Department expenditures 

are discussed at a high level in the AFR. For more details about performance, please refer to 

the Department’s budget and performance web page and performance.gov. Finally, the 

Forward-Looking Information section describes the challenges that the Department aims to 

address to achieve progress on Direct Loans, Shared Services, and Enterprise Risk 

Management (ERM). 

To view information on all Department programs, visit the Department’s website. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

FY 2016 Agency Financial Report—U.S. Department of Education 3 

Financial Highlights 

The Department expends a substantial portion of its budgetary resources and cash on multiple 

loan and grant programs intended to increase college access, quality, and completion; improve 

preparation for college and career from prekindergarten through 12th grade (P–12), especially 

for children with high needs; and ensure effective educational opportunities for all students. 

Accordingly, the Department has included more high-level 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. The revised OMB 

Circular A-123 is effective for FY 2016 and supersedes all previous versions. 

Because the Department produces an AFR, detailed performance reporting is included in the 

Annual Performance Report, as specified in OMB Circular A-11, Part 6, Section 260. A highlevel summary of performance is included in the AFR to provide context for reporting of financial 

data and assessment of controls. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

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

About the Department 

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. 

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 prohibiting discrimination in programs that receive federal funds. 

Our Public Benefit. The Department is committed to helping ensure that students throughout 

the nation develop skills to succeed in school, college, and the workforce. While recognizing the 

primary role of states and school districts in providing a high-quality education, the Department 

supports efforts to recruit, prepare, support, retain, and reward outstanding teachers and 

leaders in America’s schools. The Department supports efforts to help students succeed 

regardless of background or circumstance by establishing challenging content, setting high 

expectations for all students, and monitoring academic progress. 

The Department’s largest asset is the portfolio of student loans (see the Financial Highlights and 

Notes sections). Grants to states are the second-largest item, mostly for elementary and 

secondary education, awarded based on statutory formulas (see the chart on page 6). The third 

biggest item is student aid to help pay for college through Pell Grants, Work Study, and other 

campus-based programs (see the Notes section). The Department supports research, collects 

education statistics, enforces civil rights statutes, and also carries out competitive grant 

programs to promote innovation (see The Department’s Approach to Performance Management 

section).

Regional Offices. The Department has 10 regional offices that provide points of contact and 

assistance for schools, parents, and citizens. Regional offices offer support through civil rights 

enforcement and federal student aid services to promote efficiency, effectiveness, and integrity 

in the programs and operations of the Department. In addition to civil rights enforcement offices 

in federal regions, civil rights enforcement offices are located in Washington, D.C., and 

Cleveland, Ohio. 

Descriptions of the principal offices and overviews of the activities of the Department and its 

programs are available on the Department’s website. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

FY 2016 Agency Financial Report—U.S. Department of Education 5 

Our Organization in Fiscal Year 2016 

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

Interactive and text versions of the FY 2016 coordinating structure of the Department are 

available. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

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

FY 2015 Actual Formula Grant Distribution by Region and State 

The figures in these tables are made up of funding from multiple programs allocated to 

states based on statutory formulas. These do not include discretionary grants, need-based 

grants, or federal loans. For more details, view the Department’s State Budget Tables.

West Grades K–12 Postsec All Other 

Alaska $ 266 $ 41 $ 12 

Arizona 820 1,259 78 

California 3,947 3,985 397 

Colorado 430 478 49 

Hawaii 150 77 16 

Idaho 161 163 20 

Montana 166 71 16 

Nevada 246 145 24 

New Mexico 355 205 27 

Oregon 362 385 56 

Utah 267 373 43 

Washington 647 454 65 

Wyoming 107 36 11 

TOTAL $ 7,926 $ 7,672 $ 814 

South Grades K–12 Postsec All Other

Alabama $ 517 $ 508 $ 70 

Arkansas 347 269 54 

Delaware 112 62 16 

Dist. of Columbia 91 141 20 

Florida 1,808 1,918 215 

Georgia 1,072 1,017 82 

Kentucky 488 401 57 

Louisiana 617 371 46 

Maryland 504 411 58 

Mississippi 403 308 52 

North Carolina 962 847 125 

Oklahoma 453 309 51 

South Carolina 504 395 66 

Tennessee 652 538 84 

Texas 3,111 2,213 301 

Virginia 690 687 86 

West Virginia 214 232 42 

TOTAL $ 12,542 $ 10,628 $ 1,424 

NOTES: Dollars in millions. Detail may not add to totals 

due to rounding. Data are current as of October 21, 2016. 

Midwest Grades K–12 Postsec All Other 

Illinois $ 1,471 $ 1,243 $ 133

Indiana 652 801 71 

Iowa 276 411 33 

Kansas 320 251 25 

Michigan 1,148 919 107 

Minnesota 462 544 59 

Missouri 612 581 73 

Nebraska 203 145 23 

North Dakota 117 46 12 

Ohio 1,246 854 128 

South Dakota 163 100 12 

Wisconsin 549 427 71 

TOTAL $ 7,218 $ 6,322 $ 747 

Northeast Grades K–12 Postsec All Other

Connecticut $ 319 $ 283 $ 32 

Maine 144 111 20 

Massachusetts 644 521 64 

New Hampshire 122 122 14 

New Jersey 871 601 76 

New York 2,420 1,933 189 

Pennsylvania 1,234 977 143 

Rhode Island 129 116 17 

Vermont 91 51 18 

TOTAL $ 5,973 $ 4,715 $ 573 

Other Grades 

K–12

Postsec All 

Other

American Samoa $ 24 $ 4 $ 1 

Freely Associated States 7 15 0 

Guam 41 14 3 

Indian Set Aside 240 n/a 37 

Northern Mariana Islands 17 3 1 

Puerto Rico 686 897 80 

U.S. Virgin Islands 26 4 3 

All Other 367 n/a 41 

TOTAL $ 1,408 $ 938 $ 167
MANAGEMENT’S DISCUSSION AND ANALYSIS 

FY 2016 Agency Financial Report—U.S. Department of Education 7 

The Department’s Approach to Performance Management 

Performance Management Framework 

In accordance with the Government Performance and Results Act (GPRA) Modernization Act of 

2010, the FY 2014–18 Strategic Plan is the basis for the Department’s performance 

management framework. The Department uses quarterly performance reviews, targeted 

strategic initiatives, and outreach to leaders and stakeholders to assess progress and garner 

engagement toward achieving strategic goals and outcomes. An outline of the Department’s 

Strategic Plan is shown below.

FY 2014–18 Strategic Plan 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

8 FY 2016 Agency Financial Report—U.S. Department of Education 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

FY 2016 Agency Financial Report—U.S. Department of Education 9 

The FY 2014–18 Strategic Plan is comprised of six strategic goals, which serve as the 

foundation for establishing long-term priorities. The strategic objectives are actions that the 

Department will undertake to realize the goals. For each objective, the Department has 

established measures to gauge its progress. In collaboration with OMB and alongside the 

release of the President’s FY 2017 budget request, the Department announced its FY 2016–17 

Agency Priority Goals (APGs) and is reporting quarterly updates on performance.gov. The 

Department monitors progress toward its strategic goals and its APGs using data-driven review 

and analysis. This focus promotes active management engagement across the Department. 

Additional information on performance management is available in the Annual Performance 

Plans and Annual Performance Reports. 

The Department welcomes input from Congress, state and local partners, and other education 

stakeholders on its Strategic Plan and APGs. Questions or comments about the Department’s 

performance management framework and reporting should be e-mailed to PIO@ed.gov. 

Information in the Agency Financial Report

The Department has elected to produce separate financial and performance reports. Because 

the Department does not produce a Performance and Accountability Report, specific 

performance reporting related to the Department’s Strategic Plan may be found in the Annual 

Performance Report, published with the Budget of the United States Government (President’s 

Budget), and available on both ed.gov and the government website performance.gov. 

Performance information in the Department’s AFR is limited to high-level, cross-cutting themes 

with links to help the reader find further details on metrics and trends regarding specific 

objectives. 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. 

The high-level discussion of performance information in this year’s AFR includes performance 

matters that inform decisions of the Department and its partners. Discussions on challenges 

concerning operations and finance are provided in a section of the AFR that follows the 

Department’s Financial Highlights. 

U.S. Department of Education FY 2016 Priorities 

The mission of the Department is to promote student achievement and preparation for global 

competitiveness by fostering educational excellence and ensuring equal access. With this 

mission and challenging, far-reaching strategic goals, the Department has chosen to focus 

FY 2016 efforts in three areas. These areas, as noted in the Secretary’s message, are: 

(1) advancing equity and excellence; (2) expanding support for teachers and school leaders; 

and (3) promoting access, affordability, and completion in higher education. In addition, the 

Department has continued to encourage grantees and practitioners to use data and evidence to 

improve student outcomes. The following sections highlight a portion of the Department’s 

innovative work in these areas. 

Advancing Equity and Excellence 

The Department continues to be true to its mission to promote and support equal access to a 

quality education, from preschool through high school graduation and beyond. That vision 

includes efforts to improve student achievement and raise graduation rates; make education 

more equitable; ensure all students achieve at high standards that prepare them for college and 

careers; enhance the quality of assessments; and increase access to high-quality early learning. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

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

Early in FY 2016, the Every Student Succeeds Act (ESSA), which replaced the No Child Left 

Behind Act as the latest authorization of the Elementary and Secondary Education Act (ESEA), 

passed by substantial bipartisan majorities and was signed by President Obama. ESSA 

embraces many of the priorities and initiatives created or championed by the Obama 

administration, such as state-determined, college- and career-ready standards for every student 

and aligned statewide assessments that provide educators, parents, and communities with 

critical information each year on student progress; state-driven accountability systems that 

meaningfully differentiate between schools based on multiple measures; a commitment to 

ensuring more of our youngest learners have access to high-quality early learning opportunities; 

locally tailored systems for school improvement that include evidence-based interventions; and 

education innovation through a successor to this administration’s Investing in Innovation (i3) 

program. The Department is focused on supporting states in the implementation of the ESSA to 

ensure that it provides equal educational opportunities for all students and preserves the 

ESEA’s legacy as a civil rights law. 

ESSA advances equity by upholding critical protections and maintaining dedicated resources for 

America’s most disadvantaged students. The law requires that action will be taken to improve 

outcomes for students in schools that are among the lowest performing 5 percent of Title I 

schools in the state, that fail to graduate over one-third of their students, and where any 

subgroup of students is consistently underperforming. ESSA also creates opportunities for 

states to reclaim the goal of a rigorous, well-rounded education for every child — an education 

that not only includes math and reading, but also provides all students with access to other 

subjects, such as science, social studies, world languages, the arts, physical education, health, 

and other key areas of study. As soon as ESSA became law, the Department began developing 

materials to support its implementation at the state and local level. To date, the Department has 

published Notices of Proposed Rulemaking (NPRMs) on Title I Accountability, State Plans and 

Reports Cards, Assessments (Part A and Part B), and Supplement Not Supplant. In addition, six 

ESSA significant guidance documents have been announced. 

The Department continues to build on its commitment to high-quality early childhood education 

through the Race to the Top — Early Learning Challenge (Early Learning Challenge) program 

and Preschool Development Grants, which together have invested $1.5 billion in early learning 

across the country. The Early Learning Challenge, which the Department jointly administers with 

the Department of Health and Human Services, currently supports 20 states that are 

implementing a cohesive system of quality early learning programs and services for young 

children from birth through age 5. In addition, Preschool Development Grants have served as a 

down payment on the President’s vision for universal, voluntary access to high-quality preschool 

by providing high-quality learning experiences to children in 230 communities across 18 states.

Progress: As states develop their new plans to implement ESSA and support educational 

opportunity for all students, P–12, the nation’s graduation rate is at its highest point ever — at 

83 percent. Especially encouraging is that more historically underserved students, including lowincome students, English learners, and students with disabilities, are graduating from high 

school and going to college. In fact, the progress of black and Hispanic students since 2011 has 

outpaced the growth of all other racial/ethnic groups. Further, in the fall of 2015, Preschool 

Development Grant states enrolled 28,000 4-year-olds in high-quality programs supported by 

the grants; 35,000 more 4-year-olds were enrolled in those programs in the fall of 2016. 

However, significant challenges remain — today, only 41 percent of all 4-year-olds in the United 

States are enrolled in publicly funded preschool through state programs, Head Start, or special 

education. Even fewer are enrolled in the highest-quality programs. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

FY 2016 Agency Financial Report—U.S. Department of Education 11

In FY 2016, the Department announced a new set of APGs. Among other efforts, the 

Department is working to increase enrollment in high-quality state preschool programs and 

ensure equitable educational opportunities. Two measures of our efforts to advance equity and 

excellence are shown below. 

 

Data Source for Percentage of 4-year-old Children Enrolled: National Institute for Early Education Research 

Yearbook (The State of Preschool). 

Note: Assumptions for the years predating FY 2014 do not align the school year with the fiscal year. Data beginning 

with FY 2014 align the school year with the actual fiscal year; however, the data are not available to be reported until 

the following fiscal year. 

Data Source for Gap in the Graduation Rate: EDFacts.

Note: Data represent the previous school year’s data. For example, School Year 2014–15, which corresponds to 

FY 2015, is being reported in FY 2016. 

Expanding Support for Teachers and School Leaders 

Research shows what many of us know: a great teacher is the most important in-school factor 

contributing to student achievement.1,2 It also shows that the quality of the teacher at the head 

of the classroom is dramatically impacted by the school leader.3 Effective school leaders ensure 

the skillful recruitment and placement of quality teachers. Not only that, but teachers themselves 

report that the quality of school leadership is often one of the biggest factors in both short- and 

long-term teacher retention, as well as teacher job satisfaction.4 Yet, too many young people —

 especially students of color, low-income students, and other historically underserved children 

and youths— do not have access to the teachers and school leaders who can best help them 

 

1 Rivkin, S. G., Hanushek, E. A., & Kain, J. F. (2005). Teachers, schools, and academic achievement. Econometrica, 

73(2), 417–458.

2 Aaronson, D., Barrow, L., & Sander, W. (2007). Teachers and student achievement in the Chicago public high 

schools. Journal of Labor Economics, 25(1), 95–135.

3 See for example Branch, G., Hanushek, E. A., & Rivkin, S. G. (2012). Estimating the effect of leaders on public 

sector productivity: The case of school principals. Washington, DC: National Center for Analysis of Longitudinal Data 

in Education Research.

4 U.S. Department of Education, National Center for Education Statistics, Schools and Staffing Survey (SASS) 

“Public School Teacher Data Files,” and “Private School Teacher Data Files,” 2011–12.

 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

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

succeed.5 The Department has worked to help states and school districts support great 

educators. 

For example, the Department launched the Excellent Educators for All initiative and called on 

states to develop plans that would give low-income students the same access to high-quality 

educators as their more affluent peers. In addition, the Department recently published 

regulations to increase transparency and establish feedback loops to help teacher preparation 

programs and states ensure that educators are ready to succeed in the classroom. While giving 

states the flexibility to determine how program performance is measured, such as how 

graduates are having an impact on student learning in the classroom, the regulations build on 

reforms and innovations already happening at the state and local levels across the country. 

The Department continued to support Teach to Lead, a project that leverages the experience 

and expertise of teachers to lead transformation of the teaching profession and bring about 

better outcomes for students. Today, Teach to Lead continues its efforts to support teacher 

leadership by hosting regional leadership summits that spotlight and advance the 

groundbreaking, teacher-led work in states, districts, and schools across the country. 

With the passage of the ESSA, states and districts have a great opportunity to reimagine 

systems and strategies to better support educators in accelerating students’ performance. For 

example, the Department published Title II, Part A Guidance addressing three areas of 

opportunity: Support for Educators, Educator Equity, and Strengthening Title II, Part A 

Investments. It is essential that we build upon the progress made with the passing of ESSA if 

we are to provide every student with a rich, rigorous education. 

Progress: Under the Excellent Educators for All initiative, the Department supported a 

$4.2 million technical support network to help states plan their efforts to increase equitable 

access. The Department then published a report that highlighted which states and districts fared 

well or poorly on teacher equity. In addition, more than 40 states have committed to developing 

teacher and principal evaluation and support systems that reflect the goal of ensuring that these 

systems provide meaningful, actionable feedback to educators to improve their practice and 

increase student outcomes. 

Promoting Access, Affordability, and Completion in Higher Education 

Skills and education promote success, and that makes a college education one of the best 

investments people can make in their futures. Americans with college degrees are more likely to 

live healthier lives, be more civically engaged in their communities, have good-paying jobs, and 

experience greater job security. America’s students, families, and the economic strength they 

provide depend on a higher education system that helps everyone succeed. Achieving this goal 

requires making college more accessible, affordable, and accountable — especially for 

historically underserved students — and ensuring that students graduate in a timely way and 

with a meaningful degree as the basis to thrive in careers and life. That is why President Obama 

has worked throughout the eight years of his administration to increase college affordability, 

access, and completion. Since 2009, the Department has taken strong actions to offset the 

rising costs of higher education, including by making historic investments in federal student aid, 

such as expanding Pell Grants — federal financial aid offered to undergraduate students — and 

making student debt more manageable. The President raised the maximum Pell Grant by more 

 

5 Glazerman, Steven and Jeffrey Max. “Do Low-Income Students Have Equal Access to the Highest-Performing 

Teachers?” NCEE Evaluation Brief. Washington, D.C.: U.S. Department of Education, Institute of Education 

Sciences, National Center for Education Evaluation and Regional Assistance. Document No. PP11-23a, 2011.
MANAGEMENT’S DISCUSSION AND ANALYSIS 

FY 2016 Agency Financial Report—U.S. Department of Education 13

than $1,000 over the course of his administration, and, for the first time, tied the grant amount to 

inflation. In 2010, the Obama administration made a landmark investment in the Pell program 

through the Health Care and Education Reconciliation Act, which ended student loan subsidies 

for private banks and shifted more than $60 billion in savings back to students and taxpayers. 

Among the ways to boost college completion is by ensuring that students and families have 

information to help them apply to and enroll in a school that will help them achieve their 

educational goals. The Department built a new College Scorecard, which helps students, 

families, and those who advise them to make better decisions about one of the most significant 

financial decisions students will make in their lifetimes — where to go to college. The College 

Scorecard includes comprehensive, reliable data published on students’ employment outcomes 

and success in repaying student loans. Both the Department and other third-party developers 

are incorporating the data and the tool into their outreach directly to students, ensuring students 

and families have the information they need to find the schools that are right for them. 

Another key is helping students and their families obtain financial aid by making it easier and 

faster for them to fill out the Free Application for Federal Student Aid (FAFSA). With this 

understanding, the Obama administration took major steps to streamline the FAFSA. Today, 

more than 99 percent of the FAFSA applications are submitted online. Moreover, among 

2014–15 applicants who had filed their taxes, 58 percent of independent students and 

46 percent of parents of dependent students, or over 6 million students and parents, had used 

the Internal Revenue Service (IRS) Data Retrieval Tool, which allows students and parents to 

access and automatically transfer their IRS tax return information into the FAFSA. Finally, 

starting October 1, 2016, for 2017–18 applicants, students and families now can apply for 

financial aid earlier — as the college application process gets underway — rather than in January, 

and most families can now electronically retrieve their tax information filed for an earlier year 

from the IRS Data Retrieval Tool to use on the FAFSA, rather than waiting until tax season to 

complete their applications. 

In addition, the Department has taken comprehensive actions to protect students and taxpayers 

from the subset of institutions that engage in fraudulent, deceptive, and other predatory 

practices. That includes implementing the gainful employment rules to hold career colleges 

accountable for their students’ outcomes; publishing the borrower defense regulations to create 

a streamlined process that is fair to students who may have been victims of fraud and to hold 

colleges accountable for risky behavior; regulations to ensure the integrity of the federal student 

aid programs; and increased rigor in reviewing and holding accountable colleges and 

accrediting agencies. 

Progress: The Department’s efforts to increase financial aid helped cover the cost of college by 

about $3,700 for more than 8 million students last year, and approximately 2 million additional 

Pell Grants have been awarded to students every year since the President took office. In 

addition to keeping student loan interest rates low, a reform that could save a typical student 

$1,000 over the life of his or her loan, the Obama administration improved and expanded 

income-driven loan repayment options to ensure loan payments remain affordable. With these 

plans, borrowers set their monthly student loan payment at an amount based on income and 

family size. As of September 2016, income-driven repayment plans have enabled more than

5 million borrowers to take advantage of affordable repayment plans based on students’ 

incomes, up from 700,000 borrowers in 2011. Additionally, borrowers who have committed to 

careers in public service can have their loans forgiven after 10 years through the Department’s 

Public Service Loan Forgiveness program. 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS 

The Department has established an APG to increase college degree attainment and continues 

its efforts to improve affordability, access, and student outcomes in higher education. 

Increase in Degree Attainment among 25–34-Year-Old Age Cohort 

43.1% 44.0% 44.8% 45.7% 46.5% 

44.7% 45.6% 46.8% 48.4% 

0.0% 

5.0% 

10.0% 

15.0% 

20.0% 

25.0% 

30.0% 

35.0% 

40.0% 

45.0% 

50.0% 

Actual 

Value 

Target 

Value 

2012-Q42013-Q42014-Q42015-Q42016-Q42017-Q4 

Data Source: NCES Digest of Education Statistics, Table 104.30, Number of persons age 18 and over, by highest 

level of educational attainment, sex, race/ethnicity, and age: 2015. Tabulated from Current Population Survey data, 

U.S. Census. 

Developing and Using Data and Other Evidence 

The Obama administration’s robust support of evidence-based innovation gives states and 

school districts tools to direct their education improvement efforts toward the most effective 

practices. With a focus on new and promising efforts backed by research, the administration 

helped schools and communities create supports, partnerships, and programs to help educators 

tackle persistent challenges, accelerate achievement for all children and youth, and target 

interventions for students who were historically underserved and most vulnerable. 

The Department has pioneered efforts that encourage grantees and practitioners to use 

evidence and data in ways that improve student outcomes. The Department has significantly 

scaled up the use of evidence-based grant-making. i3, an evidence-based grant program that 

was also born out of this priority for increased innovation in education, has invested more than 

$1.3 billion in nearly 160 projects, reaching over 2 million students in all 50 states and the 

District of Columbia. As part of i3, projects were required to undergo a rigorous, independent 

evaluation and to share the results publicly, helping to identify strategies that enable students to 

excel and that educators can adopt or adapt. This work is expanding the knowledge base that 

the education field can use to help students make even greater progress in the years ahead. 

InformED is an initiative launched in 2016 to transform how the Department makes information 

available and actionable for internal users and the public, using open data and data 

transparency design concepts. The InformED initiative is building on lessons learned from the 

success of the College Scorecard and applying these lessons across the education spectrum, 

from early childhood to adult education. With resources and intuitive tools tailored to different 

audiences (such as researchers, policymakers and journalists), InformED is pulling together the 

Department’s diverse array of data and studies on a particular topic, and allowing open data 

access to help unlock answers to pressing education questions and needs. 

Progress: The Department is on track for 18 percent of new FY 2016 discretionary grant 

funding to support evidence-based practices. The i3 program has released 17 rigorous 

14 FY 2016 Agency Financial Report—U.S. Department of Education 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

FY 2016 Agency Financial Report—U.S. Department of Education 15

evaluations that can inform the field. Through InformED, the Department has launched 

numerous new products that have generated significant public interest. For example, data from 

the Civil Rights Data Collection have been downloaded over 2,700 times. In addition, more than 

1.5 million users have accessed the College Scorecard since September 12, 2015. 

The Department has established an APG to enable evidence-based decision making. The 

graphs below show measures of our efforts to increase use and generation of credible evidence 

on what works and what does not work in education. 

15.9%

29.4%

9%

11%

18%

20%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2014-Q42015-Q42016-Q42017-Q4

Percentage of New Competitive Grant Dollars that 

Support Evidence-Based Strategies

Actual

Value

Target

Value

17

10

20 20 20 20

2016-Q42017-Q12017-Q22017-Q32017-Q4

0

5

10

15

20

25

Number of Department-funded Project 

Evaluations that Provide Credible Evidence 

about What Works in Education

Actual

Value

Target

Value

Data Source for Percentage of New Competitive Grant Dollars: Forecast Report issued by the Office of the Chief 

Financial Officer (OCFO) and final Funding Reports from relevant programs. 

Note: Q4 data not yet available but expected in FY 2017. 

Data Source for Number of Department-funded Project Evaluations: Discretionary grant slate memoranda, 

discretionary grant financial forecasts and reports from OCFO, and the What Works Clearinghouse. 
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. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

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

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 15 consecutive years, the 

Department has earned an unmodified (or “clean”) audit opinion. The financial statements and 

notes for FY 2016 are on pages 46–83 and the Independent Auditors’ Report begins on 

page 92. 

Balance Sheet 

The consolidated balance sheet presents, 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 

$1,174.8 billion as of September 30, 

2016. The vast majority of the assets 

relate to credit program receivables, 

which comprised 91.6 percent of all 

assets. Direct loans comprise the largest 

share of these receivables, totaling 

$958.9 billion. All other assets totaled 

$98.2 billion, most of which was Fund 

Balance with Treasury.

The Department’s liabilities totaled 

$1,142.0 billion as of September 30, 

2016. 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. This debt totaled $1,127.8 billion 

as of September 30, 2016. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

FY 2016 Agency Financial Report—U.S. Department of Education 21

The chart to the left 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 2012 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. 

The positive allowance for subsidy 

represents an estimate of funds expected 

to be recovered in excess of principal 

loaned less anticipated defaults, loan 

cancellations, and other adjustments. This positive allowance for subsidy results 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 allowance since FY 2013 is due primarily to higher subsidy costs, 

the main cause being high participation in income-driven repayment plans. Participation in 

income-driven repayment 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. 

The table on the right shows the 

payment status of the Direct Loan 

principal and interest balances 

outstanding. The Current 

Repayment category consists of 

loans that are being paid back on 

time, including the current portion 

of loans refinanced pursuant to 

income-driven repayment plans. 

The Payments Temporarily 

Postponed category includes 

payments that have been 

temporarily suspended due to 

circumstances such as current 

enrollment in school, grace 

periods, and financial hardships. 

 Current Repayment $188.5 $247.2 $332.0 $406.8

 Payments Temporarily Postponed $336.0 $379.6 $387.3 $396.1

 Delinquent $47.8 $54.6 $65.1 $71.8

 Default/Bankruptcy/Other $41.5 $49.8 $60.7 $78.9

 Total Dollar Amount of Direct Loans Outstanding $613.8 $731.2 $845.1 $953.6

Total No. of Direct Loan Recipients (in Millions) 25.6 27.9 29.9 31.5

Loan Status

FISCAL YEAR

2013 2014 2015 2016

Payment Status of Direct Loan Principal and Interest Balances

(Dollars in Billions)
MANAGEMENT’S DISCUSSION AND ANALYSIS 

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

Loans in the Delinquent category 

are considered in “repayment”

status, but payments are 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. 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 on or 

rehabilitate. The percentage of the portfolio in current repayment, which rose from 31 percent in

FY 2013 to 43 percent in FY 2016, has eclipsed payments temporarily postponed and has 

grown far faster than loans in default. This trend coincides with an improving economy and 

matches what has been seen in other areas of commercial lending. 

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 as mandated by the Federal Credit Reform Act of 1990 (FCRA). 

The chart to the above right 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 on page 23 of 

this report. 

Statement of Net Cost 

The consolidated statement of net cost reports the Department’s components of the net costs of 

operations for a given fiscal year. Net cost of operations consists of the gross cost incurred less 

any exchange (i.e., earned) revenue from activities. Gross cost is composed of the cost of credit 

and grant programs, and operating costs. Exchange revenues are primarily interest earned on 

credit program loans. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

FY 2016 Agency Financial Report—U.S. Department of Education 23
MANAGEMENT’S DISCUSSION AND ANALYSIS 

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

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 cost of providing direct loans, but excludes the 

administrative costs of issuing and servicing the loans. The Department estimates subsidy 

expense using economic models that project cash flows on a net present value basis. 

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). The following chart 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 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 have 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. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

FY 2016 Agency Financial Report—U.S. Department of Education 25

The costs of the Direct Loan program are highly sensitive to changes in actual and forecasted 

interest rates. For example, in FY 2016, a 1 percent increase in projected borrower interest 

rates would reduce projected Direct Loan subsidy cost by $4.8 billion. 

Policy changes to student loan terms and changes in default rates also significantly affect the 

Direct Loan program subsidy expense. For example, the Department modified the repayment 

plans available to Direct Loan borrowers in FY 2015. The PAYE loan repayment option 

available to eligible borrowers caps monthly payments for many recent graduates at an amount 

that is affordable based on their income. PAYE, first announced in October 2011, caps 

payments for direct loans at 10 percent of discretionary income for eligible borrowers. Borrowers 

formerly ineligible for the more generous PAYE repayment plan are now eligible for a modified 

version of PAYE that changed income-based repayment amounts on qualified loans from 

15 percent of discretionary income to 10 percent. This modification increased subsidy expense 

that resulted from lower expected loan repayments. 

Direct Loan program re-estimated subsidy cost was adjusted upward by $21.8 billion in 

FY 2016. The re-estimates reflect several updated assumptions: however, in this case, the size 

of the net upward re-estimate was due largely to collection rates on defaulted loans and 

repayment plan selection. Actual collections on defaults since FY 2011 were lower than 

anticipated, which reduced estimated lifetime rates and increased the cost to the Department by 

$10.1 billion. For repayment plan selection, a greater percentage of borrowers chose costlier 

plans than had been estimated and increased the cost to the Department by $8.1 billion. The 

percentage of borrowers choosing an income-driven repayment plan was the primary cost driver 

for that assumption. 

Analysis of Net Cost by Program 

As required by the GPRA Modernization Act of 2010, each of the Department’s reporting groups 

and major program offices have been aligned with the strategic goals presented in the 

Department’s FY 2014–18 Strategic Plan. As further described in the performance section of the 

Management’s Discussion & Analysis, Strategic Plan Goals 1–5 are sharply defined directives 

that guide the Department’s program offices to carry out the vision and programmatic mission; 

the net cost programs can be specifically associated with these five strategic goals. The 

Department also has a cross-cutting Strategic Plan Goal 6, U.S. Department of Education 

Capacity, which focuses on improving the organizational capacities of the Department to 

implement the Strategic Plan. As a result, the Department does not assign specific programs to 

Strategic Plan Goal 6 for presentation in the statement of net cost. 

Net Cost Program Program Office Strategic Goal

Program A: 

Increase College 

Access, Quality, and 

Completion 

Federal Student Aid 

Office of Postsecondary 

Education 

Office of Career, Technical, 

and Adult Education 

Goal 1: Postsecondary Education, Career and 

Technical Education, and Adult Education. 

Increase college access, affordability, quality, and 

completion by improving postsecondary education 

and lifelong learning opportunities for youths and 

adults. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

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

Net Cost Program Program Office Strategic Goal

Program B:

Improve Preparation for 

College and Career 

from Birth Through 12th 

Grade, Especially for 

Children with High 

Needs

Office of Elementary and 

Secondary Education

Goal 2: Elementary and Secondary Education.

Improve the elementary and secondary education 

system’s ability to consistently deliver excellent 

instruction aligned with rigorous academic standards 

while providing effective support services to close 

achievement and opportunity gaps, and ensure all 

students graduate high school college- and careerready.

Goal 3: Early Learning.

Improve the health, social-emotional, and cognitive 

outcomes for all children from birth through 3rd 

grade, so that all children, particularly those with high 

needs, are on track for graduating from high school 

college- and career-ready.

Program C: 

Ensure Effective 

Educational 

Opportunities for All 

Students 

Office of English Language 

Acquisition 

Office for Civil Rights 

Office of Special Education 

and Rehabilitative Services 

Goal 4: Equity. 

Increase educational opportunities for underserved 

students and reduce discrimination so that all 

students are well-positioned to succeed. 

Program D: 

Enhance the Education 

System’s Ability to 

Continuously Improve 

Institute of Education Sciences 

Office of Innovation and 

Improvement 

Goal 5: Continuous Improvement of the U.S. 

Education System. 

Enhance the education system’s ability to 

continuously improve through better and more 

widespread use of data, research and evaluation, 

evidence, transparency, innovation, and technology. 

The Department has more than 100 grant and loan programs 

(www.ed.gov/programs/inventory.html). In the statement of net cost, they have been mapped to 

the applicable strategic goals. The Department’s FY 2016 expenditures for grant programs 

totaled over $75 billion. The three largest grant programs are Title I, Pell, and the Individuals 

with Disabilities Education Act grants. 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. The following table presents a breakdown of net cost by program for 

FY 2016 and FY 2015. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

FY 2016 Agency Financial Report—U.S. Department of Education 27

The FY 2016 increase in net cost for Program A is primarily attributed to subsidy loan expenses. 

FY 2016 Direct Loan program and FFEL program subsidy expense increased by $17 billion and 

$14 billion, respectively, from FY 2015 subsidy expense amounts. 

Statement of Changes in Net Position 

The consolidated statement of changes in net position reports 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. Net 

position of the Department totaled $32.8 billion for the period ended September 30, 2016. This 

reflects a 40 percent decrease over the net position of $54.8 billion from the prior fiscal year. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

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

Statement of Budgetary Resources 

The combined statement of budgetary resources presents information on how budgetary 

resources were made available and their status at the end of the fiscal year. Information in this 

statement is reported on the budgetary basis of accounting as prescribed by OMB and 

Treasury. 

The Department’s budgetary 

resources totaled $335.0 billion for 

the period ended September 30, 

2016, decreasing from 

$349.7 billion, or approximately 

4.2 percent from the prior year. 

Budgetary resources are comprised 

of appropriated budgetary 

resources of $103.2 billion and 

non-budgetary credit reform 

resources of $231.8 billion. The 

non-budgetary credit reform 

resources are predominantly 

borrowing authority for the loan 

programs. 

Gross outlays of the 

Department totaled 

$285.2 billion for the 

period ended 

September 30, 2016, 

and consisted of 

appropriated budgetary 

resources of 

$88.4 billion and 

non-budgetary credit 

program funding of 

$196.8 billion. Gross 

outlays are primarily 

comprised of credit 

program loan 

disbursements and 

claim payments, credit 

program subsidy interest payments to Treasury, and grant payments. Additional information on 

the Department’s sources and uses of funds is shown in the schedule of spending on page 133. 

This schedule includes sections titled, “What Money Is Available to Spend,” “How Was the 

Money Spent,” and “Who Did the Money Go To.”
MANAGEMENT’S DISCUSSION AND ANALYSIS 

FY 2016 Agency Financial Report—U.S. Department of Education 29

Limitations of the Financial Statements 

Management has prepared the accompanying financial statements to report the financial 

position and operational results for the U.S. Department of Education for FY 2016 and FY 2015, 

pursuant to the requirements of Title 31 of the United States Code, section 3515(b). 

While these statements have been prepared from the books and records of the Department in 

accordance with generally accepted accounting principles for federal entities and the formats 

prescribed by OMB, these statements are in addition to the financial reports used to monitor and 

control budgetary resources, which are prepared from the same books and records. 

The statements should be read with the realization that they are a component of the U.S. 

government, a sovereign entity. The implications of this are that the liabilities presented herein 

cannot be liquidated without the enactment of appropriations, and that ongoing operations are 

subject to the enactment of future appropriations. 
MANAGEMENT'S DISCUSSION AND ANALYSIS 

Analysis of Systems, Controls, and Legal Compliance 

Management Assurances 

The Secretary of Education's 2016 Statement of Assurance provided below is the final report 

produced by the Department's annual assurance process. 

STATEMENT OF ASSURANCE 


FISCAL YEAR 2016 


November 14, 2016 

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 (0MB) 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 programmatic 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 0MB 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 

0MB 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, 2016. 

30 FY 2016 Agency Financial Report-U.S. Department of Education 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

FY 2016 Agency Financial Report—U.S. Department of Education 31

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 2016 to meet the three 

objectives. 

Control Framework and Analysis 

As indicated in the performance management section above, the Department’s Strategic Plan, 

including the six FY 2016–17 APGs, sets the foundation for determining the Department’s 

mission goals and objectives. Underpinning the Department’s internal control framework are its

organizational structure, people, processes, policies and procedures, systems, controls, and 

data. 

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 all 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. 

The Department maintains a comprehensive internal control framework and assurance process 

as depicted in the following diagram. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

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

Internal Control Framework and Assurance Process

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 who provide strategic direction and guidance to the SAT and CAT. 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 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

FY 2016 Agency Financial Report—U.S. Department of Education 33

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 their assessment, principal office 

staff consider 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 

consults 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. 

Analysis of Controls 

Overall, the Department relies on the principal office annual assurances, supported by riskbased 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”). Additionally, the Department 

overhauled its entity-level assessment to reflect the updated Green Book. 

In FY 2016, the Department identified no material control weaknesses related to effective and 

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 and the major challenges identified 

by the Department’s OIG in its OIG FY 2017 Management Challenges report. The Department 

continues to demonstrate its commitment to addressing, mitigating, or resolving its identified 

management challenges, at the level of root cause, to ultimately eradicate systemic and 

persistent barriers to achieving its mission, and optimal performance. 

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: 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

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

 comprehensive process documentation for the Department’s significant business processes 

and subprocesses, 

 maintenance of a control catalogue composed of 1,716 key financial and operational 

controls that align to the business processes6 (the Department monitors 312 key controls 

and FSA monitors 1,404 key controls [243 entity-level controls, 850 servicer controls, 

311 FSA controls]), 

 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 2016, the Department tested 150 key financial controls. Although some weaknesses 

were detected in the design and effectiveness of controls, the Department did not identify any 

material weaknesses. Corrective actions have been initiated for the deficiencies identified. 

Furthermore, to ensure data accuracy and strengthen internal controls, the Department 

migrated 20 of its manual reconciliations to an automated reconciliations platform. The 

Department has undertaken a broader FM segment modernization plan and has identified 

further manual reconciliations to be automated in the future. 

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 8,800 Departmental internal 

users in Washington, D.C., and 10 regional offices throughout the United States, as well as 

39,600 external users. EDCAPS is composed of five main linked components: 

 Financial Management Support System (FMSS), 

 Contracts and Purchasing Support System (CPSS), 

 Grants Management System (G5), 

 E2 Travel System, and

 Hyperion Budget Planning. 

 

6

 These figures include FSA. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

FY 2016 Agency Financial Report—U.S. Department of Education 35

The Department designated the FMSS as a mission-critical system that provides core financial 

management services, and focused its system strategy on the following areas during FY 2016: 

 managing and implementing cross-validation rules throughout the fiscal year to prevent 

invalid accounting transactions from being processed, 

 developing an interface solution with FSA to eliminate the manual collections processing of 

funds returned to the Department for Perkins Loan Program, 

 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,

 meeting required timelines for a successful Digital Accountability and Transparency Act of 

2014 (DATA Act) implementation, and 

 establishing transaction assurance reports for validating the condition of data processed 

through external interface files. 

In FY 2017, EDCAPS will continue to provide customer service and improve security of its 

systems by completing the Department’s compliance with Homeland Security Presidential 

Directive (HSPD-12) user access requirements. The Department is also working to implement 

interface enhancement between the Invoice Processing Platform and FMSS to automate the 

receipt creation process, the Purchase Order balances and invoices matching process, and the 

invoice approval process in FMSS. 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

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

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 selfassessments, system-level general controls tests, and the results of 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. 

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 agencywide 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 2016 to improve cybersecurity capabilities and functions, some of which 

included: 

 With the issuance by OMB of the federal government’s Cybersecurity Strategy and 

Implementation Plan (CSIP), the Department focused many of its efforts in FY 2016 to 

address the recommendations and actions highlighted in the CSIP in order to resolve any 

cybersecurity gaps and emerging priorities that were noted across the government. The 

CSIP required the Department to prioritize the identification and protection of high-value 

information and assets. The Department completed this action, which will enable the 

Department to better understand the potential impact from a cyber incident, and helps to 

ensure that robust physical and cybersecurity protections are in place for our high-value 

assets (HVAs). 

 The Department continued to enhance the capabilities of the Department’s Security 

Operations Centers (SOCs). The Department has fully deployed the Einstein capabilities in 

order to enhance our ability to detect cyber vulnerabilities and protect against cyber threats. 

The Department has also continued to strengthen its partnership with DHS for the project 

planning that will accelerate the deployment of Continuous Diagnostics and Mitigation 

(CDM) capabilities. This will further enhance capabilities that the Department initiated in 

2016 to implement network access control (NAC) and data loss prevention (DLP) solutions. 

The CDM solution will also enable the Department to enhance our configuration 

management capabilities. 

 The Department continued its progress of implementing and enforcing the use of multifactor 

authentication for all federal employees, contractors, and other authorized users. The 

Department and FSA focused on increasing the issuance of Personal Identity Verification 

(PIV) and PIV-I two-factor authentication cards to privileged users to meet OMB 

requirements. 

 The Department made significant strides in its identification, tracking, and remediation of 

unsupported software across the enterprise. 

 The Department achieved all targets in the completion of required annual cybersecurity 

training courses, and also successfully completed a number of phishing exercises. Of note, 

100 percent of Department users completed the annual computer security and privacy 

awareness training course. The Department strictly enforced compliance with annual 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

FY 2016 Agency Financial Report—U.S. Department of Education 37

security and privacy awareness training requirements, and disabled network accounts for 

noncompliant users. 

 There has also been an increased Departmental focus on data security at institutions of 

higher education (IHEs). FSA issued a new “Dear Colleague Letter” to IHEs that receive 

financial aid stressing the need to comply with the Gramm-Leach-Bliley-Act (GLBA) 

standards and announcing that these standards would now be included in future reviews to 

be conducted by the Department. The Department recognizes that it is vital to focus on 

cybersecurity at these IHEs as they connect to FSA systems and access FSA data. It is 

noteworthy that the Department has successfully implemented two-factor authentication for 

all external users of the G5 system, which is a customer-facing grants management system. 

The Department has also engaged the General Services Administration to investigate the 

use of Login.gov for two-factor authentication to other Department citizen-facing information 

systems. 

As a result of the Department implementing a comprehensive set of activities to strengthen the 

overall cybersecurity of the Department’s networks, systems, and data, significant 

improvements in its information security program were highlighted by the Department 

completing actions to close 25 of the 26 recommendations to address the 16 findings made by 

the OIG in its FY 2015 annual FISMA audit. For the FY 2016 annual FISMA audit, the OIG is 

only reporting 15 recommendations to address 11 findings, which reflects a noteworthy drop in 

the total number of findings and recommendations from the previous reporting year. 

The OIG FISMA Audit objective was to conduct annual independent evaluations and tests to 

determine the effectiveness of the information security program policies, procedures, and 

practices of the Department. Unfortunately, the OIG was provided revised guidance in the last 

week of the fiscal year for how to score and assess the effectiveness and maturity levels 

achieved in each of the major parts of the Department’s information security program. This late 

issuance of the guidance left the Department unable to prioritize or allot resources early in the 

fiscal year to better address some of the specific criteria that were part of the new OIG scoring 

methodology. The FY 2016 OIG FISMA reporting metrics are organized around the five security 

functions outlined in the National Institute of Standards and Technology’s (NIST) Framework for 

Improving Critical Infrastructure Cybersecurity (Cybersecurity Framework): Identify, Protect, 

Detect, Respond, and Recover. The overall results of the OIG audit work for FY 2016 

determined that the Department’s implementation of two of the five Cybersecurity Framework 

security functions were assessed to be effective and were rated to be at the highest maturity 

level. The two Department security functions that were determined to be effective are the 

security elements of Identify and Recover. The OIG also assessed that the Department needed 

to continue to make improvements in order to achieve effective maturity level ratings in the 

Cybersecurity Framework security functions of Protect, Detect, and Respond. 

The FY 2016 Financial Statement Audit report contained three new recommendations for the 

Chief Information Officer’s attention: 

 Ensure the update, review, approval, and dissemination of the Information 

Assurance/Cybersecurity Policy and associated guidance is completed in order to comply 

with NIST standards and OMB guidance; 

 Design and implement controls over the handling of Department security and privacy 

incidents to ensure their resolution is properly documented; and 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

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

 Strengthen and refine the process for holding system owners and information system 

security officers accountable for remediation of control deficiencies and ensuring that the

appropriate security posture is maintained for Department and FSA information systems.

The following recommendations were noted as “Repeat Findings” in the audit report:

 Refine and fully implement FSA’s system security program to monitor compliance with NIST 

requirements, in coordination with the Department’s organizationwide information security 

program, at both the agency and system level; 

 Strengthen and refine the process to ensure accountability for individuals responsible for 

remediating the identified control deficiencies in the Department’s and FSA’s systems, 

including cooperation between the Technology Office and Business Operations; and 

 Strengthen and refine the process for holding contractors accountable for remediation of 

control deficiencies in the Department’s and FSA’s systems.

The Department Chief Information Officer concurs with the recommendations and will be 

developing the required corrective action plans to address them. 

Internal Control over Payments 

The Department’s FY 2016 Statement of Budgetary Resources reports $285 billion in total 

outlays, consisting of appropriated budgetary resources of $88 billion and non-budgetary credit 

program funding of $197 billion. The Department developed robust internal controls to ensure 

payment integrity and to prevent, detect, and recover improper payments. Key controls related 

to payment integrity include:

 preaward risk assessments, 

 use of independent data sources (such as IRS data retrieval) to ensure accurate award 

amounts, 

 automated system controls to detect and prevent payment errors, and 

 award and payment monitoring. 

Additionally, the Department must rely on controls established by fund recipients who make 

payments on behalf of the Department. These controls are outside of the Department’s 

operational authority and present higher risks, as evidenced by the OIG work identifying 

instances of questioned costs and restitution payments. 

As described below, in FY 2016, the Department determined that its Pell Grant and Direct Loan 

programs were susceptible to significant improper payments risk. A detailed description of the 

Department’s controls over improper payments related to these two programs is presented in 

the Other Information section of this report. 

In addition, the Department launched Phase I of the Payment Integrity Workgroup in FY 2016 to 

catalog internal controls around payment integrity to ensure proper payments. Starting in late 

FY 2016, Phase II of the project is in process to further define and demonstrate payment 

integrity. The workgroup plans to work collaboratively with process owners to validate internal 

control measures, develop corrective action plans, address gaps, and ensure the accuracy of 

the specific controls. The desired outcome of this effort is to minimize improper payments, 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

FY 2016 Agency Financial Report—U.S. Department of Education 39

improve risk assessment and response, develop more efficiency in the process, and increase 

positive assurance submissions. 

Internal Control Exceptions 

The Department identified two instances of noncompliance with laws and regulations in 

FY 2016. Additionally, reviews and assessments conducted pursuant to information technologyrelated laws and regulations identified challenges still facing the Department. 

Improper Payments Information Act of 2002 

The Improper Payments Information Act of 2002, 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 annually report 

improper payments in programs susceptible to significant improper payments. IPERA also 

requires agency Inspectors General to review agency improper payment reporting in the AFR 

and accompanying materials, and to determine whether the agency has met six compliance 

requirements. 

OIG audits of the Department’s IPERA compliance for FY 2015 and FY 2014 found that the 

Department was not compliant, because estimated improper payments for the Direct Loan 

program those years did not meet the annual reduction target published in the prior year AFR. 

The complete OIG reports are available for review at the OIG website. A detailed description of 

the findings and corrective actions related to this issue of noncompliance is presented in the 

Other Information section of this report. 

We anticipate that the 2016 OIG audit will again find that, as of September 30, 2016, the 

Department was not compliant with IPERA because the FY 2016 improper payment rates did 

not meet the annual reduction targets for the Direct Loan or Pell Grant programs published last 

year. 

This determination of noncompliance with the IPERA does not represent a material weakness in 

the Department’s internal controls.

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. 

113-101, 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 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. As of September 30, 2016, the Department and FSA were not in 

compliance with the new 120-day referral requirement in 31 U.S.C. Section 3716(c)(6) because 

FSA had not yet revised its loan servicing systems, procedures, and internal processes in 

response to this interpretation. During FY 2016, FSA did identify policy changes required to 

work towards achieving compliance. As of the end of FY 2016, FSA is vetting these policy 
MANAGEMENT’S DISCUSSION AND ANALYSIS 

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

changes and expects to begin a multiple-year implementation in FY 2017. This area of 

noncompliance is noted in the independent auditors’ report, exhibit B.

This determination of noncompliance with the DCIA does not represent a material weakness in 

the Department’s internal controls.