ARCHIVED INFORMATION -- Annual Accountability Report Fiscal Year 1995

United States Department of Education

Washington, D.C. 20202

Steven A. McNamara
Assistant Inspector General for Audit Services
U.S. Department of Education
Washington, DC 20202

Dear Mr. McNamara:

This is in response to your request for comments on the draft audit report on the first Department of Education (ED) agency-wide financial statements issued. As noted, these statements and the related audit are for the fiscal year ended September 30, 1995, the year prior to the first year required by the Government Management Reform Act of 1994 (GMRA).

Many of the audit report issues relate to longstanding problems of the Federal Family Education Loan (FFEL) Program. Those problems stem mostly from the structure of this program which causes the Department to depend on guaranty agencies and lenders to provide student loan data. ED's relationship with these independent entities is not structured to give the Department sufficient leverage to assure the adequacy of guaranty agency and lender operations that affect FFEL Program management and cost. This dependency on outside entities to provide needed program data has made it difficult to cure the errors and missing data discussed in this and previous audit reports. However, the Department will continue to work closely with the appropriate FFEL Program entities to improve the quality of the data in its FFEL Program systems.

While we agree with the need to further improve the FFEL Program data, we believe the reported FFEL Program liability for loan guarantees of $12.9 billion is reasonable. This amount is based on an independent actuarial analysis of available student loan data in conjunction with our actual cash flow experience over the past four years. During this period of time, our estimated liability amounts have been consistently conservative compared with our actual cash flow experience.

The audit report stated that we reported FFEL Program defaulted loans receivable held by guaranty agencies at an amount $888 million in excess of guaranty agency records. However, we reduced our general ledger accounts receivable balance by this amount before preparing the final financial statements. This adjustment was made because our FFEL Program subsidiary systems, which are not yet fully integrated with our general ledger, did not properly post guaranty agency collections to the general ledger. Therefore, net receivables for defaulted loans held at guaranty agencies, as adjusted, are correctly reflected on our financial statements and agree with the amounts that the guaranty agencies reported to us.

Since passage of the Chief Financial Officer's Act of 1990, we have continued to make improvements in the operations of the FFEL Program. These program improvements were made in the areas of recruiting and training high quality program and financial managers, further implementation of the National Student Loan Data System (NSLDS), developing Education's Centralized Administrative Processing System (EDCAPS), and further enhancements to gatekeeping, guaranty agency and lender oversight functions. ED has also continued to transition student loans from guaranteed to direct lending, which we believe is more conducive to sound program and financial management because the Department has direct access to student loan data.

Another issue raised in the audit report was the $183 million difference of reported funds in excess of Treasury's balances. This difference, representing a small percentage of our $39 billion Fund Balances with Treasury at September 30, 1995, results primarily from our lack of integrated accounting and financial management systems. We expect this issue to be fully resolved by the time EDCAPS, our new integrated financial management system, is implemented in late 1997.

With respect to the other issues raised in the report, we are in general agreement with most of these issues. However, before developing a comprehensive corrective action plan, we need to further analyze the specific audit report recommendations to determine the best way to proceed toward achieving the desired results. We plan to do so promptly and to take all appropriate corrective actions as soon as possible.

Thank you for the opportunity to comment on the draft report. The Department is committed to continuing efforts to improve management over departmental programs and to better serve program participants and taxpayers. If you have any questions on our approach to addressing issues raised in the audit, please contact Gloria Jarmon, Office of the Chief Financial Officer, at (202) 401-0561 or Linda Paulsen, Office of Postsecondary Education, at (202) 708-4664.

Sincerely yours,

Mitchell L. Laine
Acting Chief Financial Officer
David A. Longanecker
Assistant Secretary for
   Postsecondary Education


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