FSA manages and administers student financial assistance programs authorized under title IV of the Higher Education Act of 1965 (HEA), as amended. These postsecondary programs include the William D. Ford Federal Direct Loan Program (often referred to as the “Direct Loan”), the Federal Family Education Loan Program (often referred to as the “Guaranteed Loan”), the Federal Pell Grant Program, and campus-based programs. Annually, these programs provide more than $50 billion in student aid to approximately 8 million students and their families. As a consequence, the student financial aid environment is large and complex. It involves about 5,300 schools authorized to participate in the title IV program, 4,100 lenders, and 36 guaranty agencies. Currently, FSA oversees or directly manages approximately $200 billion in outstanding loans representing about 100 million borrowers. Congress has recognized the need to make federal agencies more results- oriented by shifting from a focus on adherence to required processes to a focus on achieving program results and customer satisfaction. Toward this end, Congress established PBOs, which are discrete management units remaining in their current department under the policy guidance of the department secretary. PBOs are to commit to clear management objectives and specific targets for improved performance. These clearly defined performance goals, coupled with flexibility in managing operations and direct ties between the achievement of performance goals and the pay and tenure of the head of the PBO and other senior managers are intended to lead to improved performance. In October 1998, Congress established FSA as the government’s first PBO. As defined in the legislation, the specific purposes of the PBO are to improve service in the student financial assistance programs; reduce costs of administering the programs; increase accountability of officials; provide a greater flexibility in management; integrate information systems; implement an open, common, integrated delivery system; and develop and maintain a system containing complete, accurate and timely data to ensure program integrity. FSA’s enabling legislation also, among other things, requires the appointment of a chief operating officer; requires the development of 5-year and annual performance plans; requires the PBO, through the secretary, to report annually on the performance of the PBO; requires the PBO to have performance agreements for the COO and other senior managers; requires the COO in consultation with the secretary to appoint a student loan ombudsman; allows for the payment of performance bonuses to the COO and other senior managers; allows FSA to make use of certain personnel and procurement flexibilities. We have reported on selected agencies’ use of performance agreements, including FSA, the Department of Transportation, and the Veterans Health Administration. Although these three agencies developed and implemented agreements that reflected their specific organizational priorities, structures and cultures, we identified five common emerging benefits from each agency’s use of the agreements. These emerging benefits include: strengthened alignments of results-oriented goals with daily operations, collaboration across organizational boundaries, enhanced opportunities to discuss and routinely use performance information to make program improvements, results-oriented basis for individual accountability, and continuity of program goals during leadership transitions. In addition to FSA, other PBOs include the U.S. Patent and Trademark Office (USPTO), established as a PBO in March 2000, and the Federal Aviation Administration’s Air Traffic Organization (ATO), in December 2000. Similar to FSA, USPTO, and ATO are subject to the policy direction of their parent departments and are to have the flexibility and independence to operate more like a business, with greater autonomy over their budget, hiring, and procurements in carrying out their functions. Further, USPTO and ATO are also required to designate an individual responsible for operational improvements, develop multiyear and annual performance plans, implement performance agreements, and provide for performance bonuses. The British Next Steps initiative was used as a model in crafting the PBO concept in the United States. The Next Steps agencies—now known as executive agencies—are still the predominant form of service delivery in the United Kingdom. As of December 2001, there were over 130 executive agencies covering more than three-quarters of the British civil service. FSA has taken several steps toward developing and implementing a strategic direction—its plan for achieving the purposes Congress specified for it in the PBO legislation—but, even though these efforts have shown promising results, additional actions are needed. FSA’s performance plan discusses its three strategic goals—increase customer and employee satisfaction while decreasing unit cost—and the annual goals and strategies it will use to accomplish these three goals. The performance plan, however, could be more useful to congressional decision makers with respect to systems integration and program integrity. FSA has also begun to implement a balanced scorecard—a report that links employees’ day-to-day activities with the organization’s progress toward its strategic goals, but even with the scorecard, some employees have found it difficult to make this link. Finally, FSA and the department have not met its requirement to report annually to Congress on its progress in meeting the goals laid out in its performance plan, along with other requirements specified in the PBO legislation. FSA’s performance plan discusses strategic goals for increasing customer and employee satisfaction and reducing unit costs. In addition, it includes measures for gauging FSA progress in meeting each of these strategic goals. (See table 1.) FSA’s management uses these goals and associated performance measures to determine areas for quality improvement, monitor changes in customer perceptions, and evaluate the success of ongoing quality improvement efforts in its student aid delivery. To measure customer and employee satisfaction, FSA uses the American Customer Satisfaction Index (ACSI) and the Gallup Q12, respectively. Both measures are used by the private sector and other government entities, and, as a result, FSA can compare its own scores with those of others. FSA’s scores on both the ACSI and Gallup Q12 increased from fiscal year 1999 through fiscal year 2001, suggesting improvement in both areas. Indeed, comments from representatives from several higher education associations we interviewed and who work closely with FSA also suggest that customer satisfaction has improved. For example, an association official noted the willingness of FSA managers to listen and learn from students, schools, and lending institutions. To track reductions in costs, FSA has developed a unit cost measure. FSA uses the measure to demonstrate how it is reducing the cost of administering the student aid programs. However, FSA’s current calculation has some limitations in this regard. First, in calculating unit cost, FSA divides budget obligations (an obligation reserves funds for an eventual cash payment for goods and services) by the total number of people who received aid. This means that FSA’s unit cost does not measure costs, per se. Further, the unit cost calculation does not include obligations FSA sees as beyond its control—obligations for services shared with the department (e.g., telecommunications) and obligations associated with loan consolidation, which is influenced by demand, for example. Obligations FSA considers as fully under its control include those for salaries and benefits, operations and modernization contracts, and general operations, such as travel, training, printing, and equipment. This means that unit cost does not measure total obligations per person receiving aid. Second, the way FSA currently calculates unit cost is a change from the way it calculated it in the past. This change makes comparing unit cost across years difficult. In 1998 through 2000, FSA calculated unit cost by dividing the actual cost (those it considered under its control) of administering student aid (instead of budget obligations) by the total number of people who had received aid. According to FSA officials, FSA changed the calculation of unit cost to make it more useful as a management tool, in part because actual costs for a particular year are sometimes not known until well into the next fiscal year and because managers are more accustomed to using budget obligations, in part because of their experience in using obligations in budget formulation and execution. Using actual cost in the calculation, the unit cost in fiscal year 2000 was $19.08. When FSA recalculated unit cost for fiscal year 2000 using budget obligations instead, the amount changed to $20.14. FSA officials told us that they believe the unit cost measure is a useful tool for internal management information purposes, allowing managers to gauge the efficiency of their operations and to highlight, for its employees, the importance of reducing costs. Although these are important objectives, FSA’s unit cost measure is less useful to congressional decision makers because, among other things, FSA does not include all program obligations in the measure nor explain the basis of its measure in reporting on its performance. According to the Federal Accounting Standards Advisory Board (FASAB), decision makers in Congress as well as the public should be provided with information on the full costs of programs and their outputs. The FASAB has also stated that agencies should develop and report cost information on consistent bases and that using different accounting bases and measurement methods can confuse users of cost information. Because FSA does not relate its unit cost measures to total program costs and because it has changed its method for calculating it, it is difficult to discern whether changes in the measure are indicative of changes in total program costs. In addressing systems integration and program integrity, FSA’s performance plan has several limitations. It is not always obvious how the goals and strategies included in the plan relate to systems integration, or how FSA can effectively assess systems integration by relying on measures for its strategic goals. Moreover, the performance plan provides only limited information regarding FSA’s strategies for achieving program integrity. Congress designated FSA as a PBO, in part, to encourage the integration of the many, disparate information systems used to deliver student financial aid. In 1997, we reported that Education would likely be unable to correct longstanding problems resulting from a lack of integration across its student financial aid systems until a sound systems architecture was established and effectively implemented.