FSA manages and administers student financial aid programs authorized under Title IV of the HEA, as amended. These programs include the William D. Ford Federal Direct Loan Program (Direct Loans), the Federal Family Education Loan Program (FFEL), the Federal Pell Grant Program (Pell Grants), and campus-based programs. The student aid environment is complex and involves a large number of parties. In 2003, about 6,600 schools, 3,700 lenders, and 36 guaranty agencies participated in the Title IV student aid programs. Additionally, there are numerous information systems, federal financial requirements, programmatic regulations, and human capital issues that also affect the delivery of student financial aid. For many years, the Department of Education designed technology systems and processes to accommodate each financial aid program as it was developed. As the demand for the programs grew, so did the number of systems needed to support institutional participation, student eligibility determination, aid disbursement, operational accounting, and financial record keeping for the many disparate programs involved. After 30 years of such practices, the department was left with stand-alone information systems and separate delivery processes that were not integrated with one another. Consequently, student aid delivery became replete with redundant data, rising costs, complex rules, and inefficiency for everyone involved. The process to gain access to student financial aid programs required users, such as an educational institution’s financial aid or accounting staff, to continually log in and out of different systems for related aid information on students for each program. Accessing the student information for each FSA program often required the use of different school identifiers and passwords, and users often did not have the ability to retrieve necessary information when they did gain access. We previously reported that the problem of not having access to current, accurate information sometimes led to loans and grants being improperly awarded. In 1999 FSA began implementing a strategy to integrate its many disparate systems. In response to the growing complexity, increasing demand, and the likelihood for fraud, waste, and abuse associated with the student aid programs, the Congress established FSA as the government’s first PBO in October 1998. 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 greater flexibility in management; integrate information systems; implement an open, common, integrated delivery system; and develop and maintain a financial aid system containing complete, accurate, and timely data to ensure program integrity. FSA’s enabling legislation also established several requirements and provided certain flexibilities. These requirements included the appointment of a chief operating officer (COO), the establishment of a fair and equitable system for measuring staff performance, and the development of annual performance agreements for the COO and other senior managers. In exchange for increased accountability, the legislation allows for the payment of performance bonuses to the COO and senior managers hired under the excepted service hiring authority, and the law allows FSA to hire an unlimited number of Senior Executive Service (SES) personnel and a limited number of excepted service technical/professional staff. Additionally, the law established several annual reporting requirements to inform the Congress and the public of the progress that FSA was making toward achieving its intended purposes and goals. Specifically, among other things, FSA must (1) develop and publicly release each year a 5-year performance plan that includes measurable goals and objectives as well as the action steps necessary to achieve a modernized student financial assistance delivery system and (2) provide an annual report to the Congress that describes the results achieved relative to its goals and objectives. The annual performance report must include (1) a copy of the current year’s independent financial audit report; (2) a discussion of financial and performance requirements applicable to the PBO under the CFO Act and GPRA, (3) results achieved in the previous year; (4) evaluation ratings of the COO and senior managers, including the amounts of bonus compensation awarded to these individuals; (5) recommendations for legislative and regulatory changes; and (6) other such information required by the Director of the Office of Management and Budget (OMB). The planning and reporting requirements are consistent with federal reform laws, such as the CFO Act, GPRA, Federal Managers’ Financial Integrity Act (FMFIA), Federal Financial Management Improvement Act (FFMIA), and others intended to reshape the way government conducts its business. FSA’s budget supports its staff, contractors, and day-to-day operations. In fiscal year 2004, FSA’s operating budget was $621 million. FSA worked with about 3,800 contractors and employed about 1,100 staff. As of June 2004, FSA had 10 organizational units at its headquarters in Washington, D.C., and some of these units also have regional offices in 10 states nationwide. Figure 1 illustrates the organizational structure of its headquarters office. Federal agencies, including FSA, face human capital challenges. Recognizing this, in 2001 GAO designated strategic human capital management as a governmentwide high-risk area. With respect to FSA, we reported in 2002 that almost 40 percent of the agency’s workforce was eligible for retirement. We also reported that the agency had experienced difficulty in reaching agreement with its union on a past human capital initiative. Additionally, we noted that particular attention was needed to address human capital planning, leadership continuity, and succession planning, as well as recruitment and development to meet organizational needs. FSA has made progress in addressing key issues in the areas of financial management and internal control, systems integration, program integrity, and determining the cost of administering its programs, but FSA has not completely fulfilled its responsibility with respect to developing performance plans and reports. Many of the changes made by FSA have been based on GAO recommendations. Of the 22 recommendations that GAO has made related to student financial aid since 2001, we determined that FSA has fully implemented 12, partially implemented 5, and is in the process of implementing 5 others. A listing of past GAO recommendations related to FSA and student financial aid and their status is contained in appendix II. FSA’s progress varied by key area. FSA made significant progress in financial management and addressed several internal control weaknesses reported by us and outside auditors. FSA has completed several critical systems integration tasks but is not yet operating in a fully integrated environment. Also, FSA has taken some actions to improve program integrity and developed a model to calculate the cost of administering its programs. For several years, independent auditors reported serious financial management problems at FSA, but in fiscal years 2002 and 2003, the agency received an unqualified—or “clean”—opinion on its financial statements. In addition, although the auditors identified two reportable conditions, they did not identify any material internal control weaknesses in FSA’s fiscal year 2003 audit. The two reportable conditions the auditors identified concern management controls surrounding the calculation and reporting of the loan liability activity and subsidy estimates and information systems controls. FSA has developed a corrective action plan to address these findings and is working to implement it. Also, FSA prepared its financial statements earlier than required in 2003. We determined that FSA has established processes to address several internal control weaknesses. Since we previously reported that internal control weaknesses made FSA vulnerable to improper payments in its grant and loan programs, FSA has taken steps to better ensure that Pell Grants are not issued to ineligible students. In fiscal year 2002, FSA implemented a process for verifying an applicant’s age when the information indicated that the applicant was 75 or older and another process for identifying and investigating schools with high percentages of students with certain characteristics, such as older, noncitizen Pell Grant recipients. These reviews are used to identify problems such as eligibility- related violations or indications of possible fraudulent activities, which are referred to the OIG. In addition, since our finding that FSA did not correct Social Security numbers and dates of birth in all records, FSA has implemented its new loan origination and disbursement system, which automatically makes such changes to records in all systems. Independent auditors also reported in 2003 that Education’s systems did not substantially comply with the Federal Financial Management Improvement Act’s requirements. Because FSA’s financial reporting relies on the department’s systems, computer security weaknesses identified at Education also affect FSA. The auditors found that while the department had made progress in strengthening controls over information technology processes, computer security weaknesses still existed. However, the auditors also reported that these weaknesses were not material. FSA is continuing to take actions toward better integrating systems supporting its student financial aid programs. FSA’s integration strategy focuses on achieving a seamless information exchange environment in which users—students, educational institutions, and lenders—would benefit from simplified access to the agency’s financial aid processes and more consistent and accurate data across its programs. The strategy involves consolidating FSA’s existing legacy systems, in which the functionality of certain systems would be incorporated into new or modernized systems and, in the long term, integrating systems and using electronic interfaces to facilitate data exchanges across systems. Consistent with OMB guidelines, FSA has made progress toward establishing an enterprise architecture needed to guide its systems integration. An enterprise architecture provides a framework for developing and maintaining integrated information systems and establishes the rules and standards required for interrelated systems to work together efficiently and effectively. FSA has completed many of the required elements of its architecture, including the baseline and target architectures that, respectively, describe the agency’s current and future information systems environments. In addition, FSA has named a permanent chief architect, with responsibility for overseeing its systems integration efforts. FSA has also begun consolidating certain information systems, thus reducing the overall number of systems that it must rely on to administer its student financial aid programs. Over the past several years, the agency has retired 6 of 18 systems and incorporated their functionality into certain other systems.