ARCHIVED INFORMATION -- Annual Accountability Report Fiscal Year 1995

U.S. Department of Education

Notes to Principal Financial Statements

September 30, 1995

Note 1 - Reporting Entity

These consolidated principal financial statements present the financial position and activity of the U.S. Department of Education (ED), a cabinet level agency of the Executive Branch of the United States Government. ED executes programs under the Education, Training, Employment and Social Services function established by Congress in the Budget Act of 1974. ED's financial activity relates to execution of its congressionally approved budget and programs. This activity is recorded in individual general (appropriated) funds and summarized by principal office for reporting purposes.

These statements include the activity and balances of the Federal Family Education Loan (FFEL) and William D. Ford Direct Loan programs, which were reported last year as separate program financial statements for the fiscal year ended September 30, 1994. The FFEL Program, authorized by the Higher Education Act of 1965, as amended (HEA), operates with state and private nonprofit guaranty agencies to provide loan guarantees and interest supplements through permanent budget authority on loans by private lenders to eligible students attending participating postsecondary schools. The Direct Loan Program, authorized by the Student Loan Reform Act of 1993, is an alternate to the FFEL Program in which loan capital is provided by the federal government through borrowing from the U.S. Treasury.

Note 2 - Summary of Significant Accounting Policies

Basis of Presentation

These financial statements have been prepared to report the financial position, results of operations and changes in net position and cash flows of the Department, as required by the Chief Financial Officers Act of 1990 (Public Law 101-576). ED prepared the financial statements from its books and records in accordance with the Department's accounting policies, which are summarized in this note. These statements are different from the financial reports used to monitor and control the use of budgetary resources, which are also prepared by ED pursuant to OMB directives.

ED's accounting policies follow an "other comprehensive basis of accounting," comprising the following hierarchy, agreed to by the Comptroller General, the Secretary of the Treasury and the Director of the Office of Management and Budget (OMB):

  1. Accounting principles, standards and requirements approved by the above named officials. These are known as Statements of Federal Financial Accounting Standards (SFFAS).

  2. Form and content requirements in OMB Bulletin 94-01, Form and Content of Agency Financial Statements, dated November 16, 1993, and subsequent issuances.

  3. Accounting standards contained in agency accounting policy, procedures manuals, and/or related guidance as of March 29, 1991, so long as they are prevalent practices.

  4. Accounting principles published by authoritative standard setting bodies and other authoritative sources (1) in the absence of other guidance in the first three parts of this hierarchy, and (2) if the use of such accounting standards improves the meaningfulness of the financial statements.
OMB Bulletin 94-01 prescribes a framework for agencies to develop financial statements which provide information useful to Congress, government officials, and the public. OMB approved the following deviations from OMB Bulletin 94-01 in ED's Principal Statements:
The Statements of Operations and Changes in Net Position follows the format suggested in the Governmental Accounting Standards Board's Codification of Governmental Accounting and Financial Reporting Standards, which identifies a separate disclosure for the total effects of operations, exclusive of appropriations or intra-governmental funding sources.

We have replaced the two separate student loan program reporting entities with a single consolidated reporting entity for the entire Department of Education.

We have discontinued the Statement of Budgetary Resources and Actual Expenses, which is not provided for in the Government Management Reform Act of 1994 nor in the Statement of Federal Financial Accounting Concepts for Entity and Display, issued April 20, 1995 by OMB.

Basis of Accounting

Transactions are recorded on an accrual accounting basis. Therefore, revenues are recognized when earned and expenses are recognized when a liability is incurred, without regard to receipt or payment of cash.

Basis of Consolidation

The accompanying consolidated financial statements include the accounts of all funds under ED's control. All interfund balances within ED have been eliminated. The consolidated financial statements do not include centrally administered assets and liabilities related to the federal government as a whole, such as General Services Administration owned property and equipment, and borrowing from the Public by the U.S. Treasury, which may in part be attributable to ED.

Budgets and Budgetary Accounting

The components of ED's budgetary resources include current budget authority (i.e., appropriations and borrowing authority) and unobligated balances remaining from multi-year and no-year budget authority received in prior years. Budget authority is the authorization provided by law to enter into financial obligations that result in immediate or future outlays of federal funds. Budgetary resources also include reimbursements received and other income (i.e., spending authority from offsetting collections credited to an appropriation or fund account) and adjustments (i.e., recoveries of prior year obligations). Pursuant to Public Law 101-510, unobligated balances associated with appropriations that expire at the end of the fiscal year remain available for obligation adjustments, but not new obligations, until that account is canceled. When accounts are canceled, five years after they expire, amounts are not available for obligation or expenditure for any purpose.

Financing Sources and Program Revenues

ED receives the majority of the funding needed to support its programs through congressional appropriations. Borrowing from the Treasury, another financing source, provides most of the funds for the Direct Loan Program loans to students and Facilities Loan Program loans to postsecondary institutions. The effect on ED's net position of appropriations received, returned and transferred to others is shown in the Statement of Changes in Net Position.

Revenues are recognized as financing sources to the extent these receipts were payable to ED from other agencies and from the public in exchange for goods and services rendered to others. Major sources of reported revenues include interest accrued or collected from Direct Loan Program borrowers on outstanding loans receivable and interest accrued or collected from Treasury on uninvested fund balances. Fees received on student financial assistance loans, such as loan origination fees, are offset against subsidy costs and therefore are not reported as revenue.

Subsidy Estimates and Reestimates

The Federal Credit Reform Act of 1990 (CRA) was enacted to measure the costs of federal credit programs more accurately, place the cost of credit programs on a budgetary basis equivalent to other federal spending, encourage the delivery of benefits in the form most appropriate to the needs of the beneficiaries, and improve the allocation of resources among and between credit programs and other spending programs. All credit programs within ED conform with the provisions of CRA beginning with fiscal year 1992 transactions.

CRA, SFFAS No. 2 - Accounting for Direct Loans and Loan Guarantees, and related regulations and guidance, require recording the net present value of subsidy costs (i.e., estimated interest rate differentials from market rates, interest subsidies, defaults, collections on defaulted loans, fee offsets, certain administrative expenses, and other cash flows) associated with direct loans and loan guarantees to be recognized in the year loans are made for both budgetary and accounting purposes. In addition, the net present value of these subsidy costs are recorded as liabilities for loan guarantees.

Subsidies are estimated based on the difference between present values of expected government cash outflows and inflows, discounted by the interest rate earned by a Treasury debt instrument of similar term on the date loans are made. Subsidy costs are recognized as expenses in the year loans are disbursed.

In accordance with SFFAS No. 2, the subsidy costs of credit program loans are reestimated each year as of the financial statement date. A reestimate is a change in the net present value of estimated cash flows due to changes in interest rates, defaults, delinquencies, prepayment and recoveries. Any increase (decrease) in the subsidy cost resulting from the reestimates is recognized as an increase (decrease) of subsidy expense.

Fund Balances With U.S. Treasury

ED does not maintain significant amounts of cash in commercial bank accounts. Cash receipts and disbursements are generally processed by the U.S. Treasury. However, ED has the authority to disburse U.S. Treasury funds directly to agencies and institutions participating in ED programs. The Fund Balances with U.S. Treasury are primarily revolving funds, other appropriated funds and undisbursed U.S. Treasury borrowings available to pay current and finance subsidy expenses for post-1991 loans. A portion of the appropriated funds included at September 30, 1995 were forward-funded by multi-year appropriations for expenditures anticipated during the year ending September 30, 1996. ED does not have any restricted unobligated balances. Fund Balances with U.S. Treasury do not include any non-entity funds.

Investment

Congress authorized the Department to invest in the College Construction Loan Insurance Association (commonly known as Connie Lee) start up costs when it was incorporated in 1987. Connie Lee was created to insure and re-insure the financing of construction of postsecondary educational facilities. ED has two appointed members on Connie Lee's Board of Directors and holds about 14 percent of its shareholder equity. While Connie Lee may be considered a government sponsored enterprise, it is neither a government corporation nor a government controlled corporation. Therefore, ED would not incur any liabilities if Connie Lee suffered losses or went bankrupt. This investment is reported at cost. However, the Secretary of Education is authorized to sell any portion, or all, of this investment at a price equal to the original cost of purchase or at a higher price based on an independent market appraisal. No independent appraisal has been developed under this authority. Therefore, no provision is made for unrealized gains or losses on this investment.

Seven of the 21 members of the Student Loan Marketing Association (Sallie Mae) Board of Directors are appointed by the President of the United States. However, neither ED nor the federal government has any investment in that for-profit corporation. ED's transactions with Sallie Mae are essentially the same as those with any other lender organization. Grant Advances and Payables

Disbursements of funds under ED's more than 200 grant programs are generally made when requested by grantees. These drawdown requests are usually received and fulfilled before grantees make federal program expenditures. When funds have been disbursed by ED, but expenditures are not yet reported by grantee/recipients, these disbursements are reported as advances. However, if a recipient reports program expenditures that have not been advanced by ED as of September 30, 1995, such amounts are reported as grants payable and grant expenses.

Credit Program Receivables

Credit program receivables are carried at the principal amounts outstanding, net of allowances for subsidy or uncollectible receivables. Credit programs include the FFEL and Direct Loans programs, and the Facilities Loan Program. Allowances for subsidy cost represent the differences between the present values of net cash inflows and outflows of the underlying credit program loans. The cash flows include collections of principal and interest, prepayments, recoveries and fees, and disbursements of interest subsidies, special allowances and default claims. The allowance for subsidy is amortized by the effective interest method using the interest rate determined at the time credit program loans were disbursed. For the pre-CRA loans, the allowances for uncollectible receivables represents an analysis of loan collectibility based on risk groupings of borrowers.

Guaranty Agency Reserves

Federal fund balances held by the state and non-profit guaranty agencies participating in FFEL Program operations are recognized as ED receivables and as payables to Treasury as explained in Note 9. These balances are offset by an allowance for uncollectibles based on ED management's judgment.

Other Receivables

Other accounts receivable are due from recipients of grant and financial assistance programs, and other federal agencies. These amounts are initially listed and controlled in a claims-in-process file due to their contingent nature. When the collection probability of such a claim is established by obtaining a payment, promissory note, or entering into a settlement agreement with the debtor, an accounts receivable and offsetting historically determined allowance for uncollectibility is recorded in the ledgers and reported in the statements.

Liabilities

Liabilities represent the amount of monies or other resources that are likely to be paid by ED as a result of transactions or events that have already occurred. However, no liability can be paid by ED absent an appropriation or borrowing authority. Liabilities for which an appropriation has not been enacted are therefore classified as liabilities not covered by budgetary resources (unfunded liabilities). Most of FFEL and Direct Loan program liabilities result from entitlements covered by permanent authority and ED is required to pay these liabilities if all eligibility requirements are met. Any non-entitlement liability of the Department, such as federal administrative costs, not arising from contracts, and entitlements not yet vested, can be abrogated by the government acting in its sovereign capacity.

Under the FFEL Program's accounting policies, liabilities for loan guarantees include provisions for payment of loan defaults, interest and special allowance benefits, certain administrative expenses (administrative expense allowances and supplemental preclaims assistance) and interest expense. These liabilities are offset by estimated future collections on loans that will default, loan origination fees paid by borrowers, and fees paid by lenders, including Sallie Mae.

Liabilities are recognized when applicable for funds expended by state and local governments and other recipient organizations for amounts due and payable by ED under the terms of financial assistance agreements.

Borrowing from the U.S. Treasury

Borrowings from the U.S. Treasury provide most of the funding for loans in the Direct Loan and Facilities Loan programs. Principal repayments are made to Treasury based on the repayment schedules of the underlying loans. Borrowings from the U.S. Treasury are also reduced by authorized write-offs of Facilities Loan Program loans receivable. Interest is paid to Treasury based on a weighted average rate determined for each year.

Annual, Sick, and Other Leave

Annual leave is accrued as it is earned and the accrual is reduced as leave is taken. Each year, the balance in the accrued annual leave account is adjusted to reflect current pay rates. Annual leave earned but not taken, within established limits, is funded from future financing sources. Sick leave and other types of non-vested leave are expensed as taken.

Retirement Plans

The majority of ED employees participate in the contributory Civil Service Retirement System (CSRS), to which the Department makes matching contributions equal to seven percent of pay, or the Federal Employees Retirement System (FERS), offering a savings plan, which automatically contributes one percent of pay and matches any employee contribution up to an additional four percent of pay. In addition, for employees covered under FERS, the Department also contributes the employer's matching share for Social Security. ED does not report CSRS or FERS assets, accumulated plan benefits, or liabilities not covered by budgetary resources (unfunded liabilities), if any, applicable to its employees. Reporting such amounts is the responsibility of the Office of Personnel Management.

Net Position

Net position is the residual difference between assets and liabilities. It is composed of unexpended appropriations, invested capital, future funding requirements and donations. Unexpended appropriations are appropriations not yet expended, including undelivered orders.

Invested capital includes amounts advanced to guaranty agencies under sections 422(a) and 422(c) of the HEA for commencement of agency operations and making loan default payments to lenders, and acquisitions of capital assets. Net position has been reduced to reflect the excess of unfunded liabilities over any offsetting assets, which will require future funding. These unfunded liabilities include ED's liabilities for accrued leave, pre-credit reform loan guarantees, and actuarial liabilities not covered by available budgetary resources. Donations are relatively small contributions of funds which the Secretary has authority to accept and spend for certain purposes.

Comparative Data

Comparative data for the prior year have not been presented because this is the first year for which agency-wide principal financial statements are presented for ED.

Note 3 - Fund Balances with U.S. Treasury

Fund balances with the U.S. Treasury at September 30, 1995 were as follows (in thousands):
                             Obligated      Unobligated         Total
                            -----------     -----------      ----------- Forward Funded  - Revolving Funds           $ 1,939,555     $ 7,579,417      $ 9,518,972  - Appropriations             16,021,632       4,406,537       20,428,169  Current Year       - Appropriations              7,986,591         734,129        8,720,720  - Trust Funds                        73             104              177                             -----------     -----------      -----------  Total Appropriated Balances $25,947,851     $12,720,187      $38,668,038 Deposit Funds                                                    722,915  Budget Clearing Accounts                                    (     15,701)                                                             -------------   Total                                                      $39,375,252  

Note 4 - Loans and Loan Guarantees

Analyses of credit program receivables, liabilities for loan guarantees and subsidy expenses are provided in the following sections.

A. Credit Program Receivables, as of September 30, 1995 were (in thousands):

                           Defaulted                            Guaranteed          Direct        Facilities                              Loans             Loans           Loans
                          -----------          ------        ---------- Loans Receivable          $17,049,007        $3,647,074       $683,023 Interest Receivable         2,673,315            28,205         11,559                           -----------        ----------       --------- Gross Prog. Receivables   $19,722,322        $3,675,279       $694,582 Less: Allowances           16,519,294           535,398        161,496                           -----------        ----------       --------- Net Prog. Receivables     $ 3,203,028        $3,139,881       $533,086 

B. Liabilities for Loan Guarantees

Outstanding loan guarantees were approximately $93 billion at September 30, 1995. These loans were made by about 8,000 lenders and guaranteed by 41 guaranty agencies, operating in 54 states and territories. ED is contingently liable for guaranteed student loans made by lenders. These are estimated based on historical data received from guaranty agencies and lenders, and ED's cash flow data. The estimates are significantly affected by Treasury projections of future market interest rates that change the amount of special allowances to compensate lenders for program interest rates below market levels. The estimates are also affected by the types of schools attended (i.e., proprietary, two-year colleges, four-year colleges and universities, etc.) and the types of loans received (i.e., Stafford, Supplemental Loans for Students, Parents Loans for Undergraduate Students, etc.) by the student borrowers. ED's estimates, confirmed by an actuarial analysis, determined that ED's liabilities at September 30, 1995 for loan guarantees were approximately $12.9 billion as detailed below.

Liabilities for loan guarantees at September 30, 1995 were (in thousands):

                                   Pre-1992      Post-1991       Total
                                ----------     ----------   ----------- SHORT-TERM LIABILITIES         Covered by Budgetary Resources  $1,438,760     $3,366,171   $ 4,804,931  LONG-TERM LIABILITIES Covered by Budgetary Resources   2,043,286      5,002,207     7,045,493 Not Covered by Budgetary        Resources                  1,056,039         -0-        1,056,039                                 ----------     ----------   ----------- Total Long-Term Liabilities     $3,099,325     $5,002,207   $ 8,101,532  TOTAL LOAN GUARANTEE LIABILITIES Covered by Budgetary Resources   3,482,046      8,368,378    11,850,424 Not Covered by Budgetary        Resources                  1,056,039         -0-        1,056,039                                 ----------     ----------   ----------- Total Loan Guarantee        Liabilities               $4,538,085     $8,368,378   $12,906,463 

C. Subsidy Expenses

Loan guarantee subsidy expenses incurred during fiscal year 1995 were (in thousands):
Provision for Loan Defaults (Net)                $ 1,246,732  Provision for Interest Subsidies                   2,798,731  Fees                                             (   586,471) Mandatory Administrative Expense                      88,256                                                  -----------    Total Current Year Estimate                      3,547,248  Total Reestimates                                (   895,260)                                                  -----------   Total Loan Guarantee Subsidy Expense           $ 2,651,988  
Direct loan subsidy expenses incurred during fiscal year 1995 were (in thousands):
Loan Defaults (Net)                                $ 291,031  Interest Subsidies                                   206,746  Fees, net (origination less payment for     origination services)                            (116,419) Other Subsidy                                         43,161                                                     ---------   Total Current Year Estimate                        424,519  Add: Total Reestimates                                11,613                                                    ---------    Total Direct Loan Subsidy Expense                $ 436,132  

Note 5 - Guaranty Agency Advances

Advances to guaranty agencies represent amounts advanced to guaranty agencies under sections 422(a) and 422(c) of the HEA for commencement of agency operations and making loan default payments to lenders.

The balances as of September 30, 1995 were (in thousands):

Advances to Guaranty Agencies                        $40,164  Less: Allowance for Uncollectible Receivables            401                                                       ------- Advances to Guaranty Agencies, Net                   $39,763  

Note 6 - Other Receivables, Net

Non-credit program receivables consist of promissory notes and related interest receivables, other program receivables, audit receivables, reimbursables, recipient excess cash receivables, and receivables for monies owed to ED relating to travel, salary overpayments and other administrative items. These receivables are partially offset by an allowance derived from prior collection experience. Non-entity receivables at September 30, 1995 were as follows (in thousands):
Gross accounts receivable                            $56,096  Less: Allowance for uncollectible receivables         16,829                                                       ------- Net accounts receivable                              $39,267  
Entity receivables include delinquent and defaulted accounts receivable from credit and other programs that have been assigned to the Department for collection. The Other category, below, includes receivable amounts for about $2.1 million of overpaid Impact Aid awaiting offset and $8.6 million of accrued Pell interest.

These entity receivables are summarized as follows (in thousands):

                          FFEL      Facilities     Other       Total                           ------     ----------    -------     -------  Loans Receivable         $5,011       $1,914      $10,739     $17,664 Less: Allowances          1,503           57       10,620      12,180                          ------       ------      -------     ------- Net Program Receivables  $3,508       $1,857         $119      $5,484 

Note 7 - Borrowing from U.S. Treasury

A. The Emergency Unemployment Compensation Act

On September 30, 1992, the FFEL Program borrowed $2.09 billion from the U.S. Treasury in accordance with OMB instructions under the CRA on accounting for noncontractual modifications made to its loan guarantees. The noncontractual modifications were: The FFEL Program will repay the borrowing, at an annual interest rate of 7.37 percent, with increased collections on defaulted loans resulting from the noncontractual modifications. During fiscal year 1995, the FFEL Program used collections to reduce this Treasury debt as follows (in thousands):
Borrowing from U.S. Treasury, Balance 9/30/94      $ 1,605,315 Payment on Outstanding Balance, 1995               (   471,137)                                                    ------------ Borrowing from U.S. Treasury, Balance 9/30/95      $ 1,134,178  
The aggregate maturities of this debt, based on estimated collections on defaulted loans, for the years subsequent to September 30, 1995, are as follows (in thousands):
                   1996                $  453,956                    1997                   326,149                    1998                   237,302                    1999                   116,771                                        ----------                       Total            $1,134,178 

B. Borrowing for Credit Programs, Repayments and Write-offs

Borrowings, repayments and write-offs were as follows (in thousands):
                                   Direct      Facilities                                    Loans         Loans         Total
                                -----------    ----------   ----------- Borrowings from U.S. Treasury,     Balance 9/30/94               $  433,207    $ 573,051    $ 1,006,258  New Borrowings During Fiscal     Year 1995                      4,868,340       24,156      4,892,496  Repayments                      (   234,825)   (  53,357)   (   288,182) Write-offs                              -0-    (     233)   (       233)                                 -----------    ----------   ------------ Borrowings form U.S. Treasury,     Balance 9/30/95              $ 5,066,722    $ 543,617    $ 5,610,339  

C. Interest Revenues and Expense

Interest expense, federal, was comprised of the interest accrued on borrowings from the Treasury and interest expense recognized to offset interest earned on uninvested funds.

Interest revenues and expense at September 30, 1995 is summarized as follows (in thousands):

                            Direct Loan     FFEL     Facilities     Total                                -----------   --------   ----------  ---------- Interest Revenues            $340,120     $506,747   $   977     $  847,844  Interest Expense: Emergency Unemployment      Compensation Act             -         118,314        -         118,314 Subsidy                          -         506,747     1,626        508,373 Borrowings for      Credit Programs           383,177         -       26,423        409,600                              --------     --------   -------     ----------   Total Interest on        Loan Programs          $383,177     $625,061   $28,049      1,036,287 Other                                                                    45                                                                  ----------   Total Interest Expense                                         $1,036,332 

Note 8 - Salaries and Administrative Expenses

Salaries and administrative expenses by object classification at September 30, 1995 (in thousands):
Salaries and benefits                           $299,148 Travel and transportation                         11,916 Rent, communications and utilities                53,413 Printing and reproduction                         15,717 Materials, supplies and equipment                 21,738                                                 --------   Total salaries and expenses                   $401,932 

Note 9 - Commitments and Contingencies

Guaranty Agency Matters

Guaranty Agency Reserve Funds
There are approximately $1,808,966 (in thousands) as of September 30, 1995 in federal reserves at the guaranty agencies. Guaranty agency reserves are available balances resulting from receipts of federal reinsurance payments, insurance premiums, agency share of collections on defaulted loans, investment income and administrative cost allowances; and payments of lender claims, operating expenses and federal reinsurance fees. The distribution of guaranty agency default collections during the year ended September 30, 1995 was 73 percent to ED; 27 percent to the agencies.

The Balanced Budget Down Payment Act, II provides that 1) the Secretary may not require return of guaranty agency reserve funds during fiscal year 1996, except after consultation with both the Chairman and Ranking Members of the House Economic and Educational Opportunities Committee and the Senate Labor and Human Resources Committee; and 2) any reserve funds recovered by the Secretary shall be returned to the Treasury for purposes of reducing the federal deficit. In accordance with these provisions, the guaranty agency reserves are reported as both a non-entity receivable asset and a payable to Treasury. We have also recognized some uncertainty regarding the collectibility of these reserves with an offsetting allowance of $180,897 (in thousands) for a net receivable amount of $1,628,069 (in thousands).

Possible Financial Difficulties of Guaranty Agencies
Education has assisted some guaranty agencies experiencing financial difficulties from time to time through advancement of funds and other means. No provision has been made in the principal statements for potential liabilities related to financial difficulties of guaranty agencies, because the likelihood of such liabilities occurring is uncertain and cannot be estimated with sufficient reliability.

Perkins Loans Reserve Funds

The Perkins Loan Program is a campus-based programs providing financial assistance to eligible postsecondary school students based on financial need. ED provides funds to participating schools to provide about 89 percent of the capital used to make loans to eligible students at 5 percent interest. The other 11 percent of program funding is provided by the institution. For the latest academic year (ended June 30, 1995), there were about 664,000 loans made, totalling about $972 million at 2,279 schools averaging $1,464 per loan.

The funding ratio had been 90/10 from the inception of the program through June 30, 1993. Then, for the academic years ended June 30, 1994 and 1995, the ratio for capital contributions was reduced to 85/15 and 75/25, respectively. The program operates at each school like a revolving fund with loan repayment amounts available to loan to other eligible students. The schools are accountable to the Department for the federal share of their Perkins Loan funds whether held by the school or loaned to participating students. At June 30, 1995, the Department's share of the Perkins Loan Program was about $5.8 billion. However, these funds are not reported in the principal statements of the Department because the extent to which they may be recoverable cannot be determined.

Claims-in-Process

In addition to the reported non-credit program receivables (see also Note 6), about $1.06 billion of non-credit program claims, for which collection probabilities have not yet been established, are being actively pursued as claims-in-process. The estimated net realizable value of claims-in-process at September 30, 1995 is about $29 million. However, much of these amounts consist of claims in various stages in the legal process and the ultimate value cannot currently be determined with reasonable certainty. Therefore, ED will not recognize these amounts in its financial statements until they are received or assured.

Borrower Class Actions

Education is involved in pending litigation challenging the enforceability of FFEL Program loans made to students who attended various trade schools that have closed. In most instances, a large percentage of the loans in question are in default and have been acquired by guaranty agencies and reimbursed by Education. Thus, Education has already incurred losses from payment of defaults. No provision has been made in the principal statements for any potential reductions in estimated future collections related to the outcome of these suits, since Education's potential loss exposure is uncertain and cannot be estimated with sufficient reliability.

Other Matters

ED is involved in various other claims and legal actions related to its programs, arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the principal statements of the Department.

Note 10 - Subsequent Events

New Capital Financing Program

ED is establishing a Historically Black Colleges and Universities (HBCU) Capital Financing Program to facilitate construction and renovation of educational facilities by HBCUs. ED serves as guarantor for timely payment of principal and interest on bonds to be issued by a designated bonding authority, a private sector entity appointed by the Secretary. Bonds will be purchased by either private investors or the Federal Financing Bank. Proceeds of the bonds will be used for facilities loans to individual HBCUs. Each participating institution is obligated to deposit 10% of its loan proceeds into a common escrow fund that will be available for bond payments in the event of default by any participating institution. ED is contingently liable for repayment of bonds issued under this program. No loans were made as of September 30, 1995. As of March 1, 1996, loan applications for $37 million were in final stages of consideration, and other requests were in preliminary review.
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