We received comments from Education on our draft report. The Department believes its $12.9 billion liability for Federal Family Education Loan Program (FFELP) loan guarantees is reasonable. They believe it is reasonable because Education engaged an "independent"1 actuarial analysis using "available student loan data in conjunction with our actual cash flow experience over the past four years." The Department also states that its estimated liability amounts "have been close to and consistently conservative compared with our actual cash flow experience."
We disclaimed an opinion on Education's consolidated financial statements principally because we believe shortcomings in loan data were not overcome by the actuarial analysis. Moreover, the severity of the data shortcomings, particularly with respect to data on loan collections, meant that the actuarial analysis had to apply a series of assumptions about how defaulted loans were collected. For example, Education had certain collection data on individual loans since 1990. But this data was either inconsistent, in that it measured yearly loan collections in some cases and cumulative loan collections in others; or, when aggregated, it was materially different from cash flow figures reported in Education's financial statements. The actuarial contractor made the assumption that, despite its flaws, the existing data reasonably reflected the pattern by which defaulted loans were collected because it believed the effect of any data errors would be immaterial. It was also assumed that the difference between dollar collections reported in the financial statements and aggregate collections contained in the data base could be proportionally allocated to all loans, since there was no other way to apply unallocated collections to individual loans. We do not believe either of these assumptions have adequate support. Further, the number of other assumptions the contractor had to make to compensate for missing or questionable data introduces additional uncertainties into the liability estimate. As a consequence, we cannot concur with the Department's assertion that its $12.9 billion aggregate loan guarantee liability is reasonably stated.
With respect to the Department's contention that its estimated liability amounts have been close to and consistently conservative compared to its actual cash flow experience, we were provided with information in support of this statement, which we have summarized in Table 1:
Table 1 (Dollars in Thousands) Loan Guaranty Liability Comparison Provided By the Department Summary Comparison of Estimated Liabilities and Actual Expenditures Analytical For the Fiscal Year Ended September 30, Component 1992** 1993** 1994** 1995* ---------- ---------- ---------- ---------- Estimated Liability $6,119,943 $4,894,512 $5,536,702 $4,110,080 Actual Expenditures $4,503,596 $4,311,348 $3,787,647 $3,060,179 Variance $1,616,347 $583,164 $1,749,055 $1,049,901 Percent Variance 26% 12% 32% 26% * From an analysis by Education's actuarial contractor; short-term component only. ** From liability analysis prepared by Education; short-term component only.
We believe some observations about this information are necessary. First, the information relates only to components -- predominantly short-term components -- of the aggregate loan guaranty liability. For example, for fiscal year 1995, the table shows an "estimated" liability of $4.1 billion and an "actual" figure of $3.1 billion. These are portions of the aggregate 1995 liability of $12.9 billion. Second, the table indicates that the "estimated" component of the liability exceeded "actual" by $1.7 billion in 1994 and $1.6 billion in 1992. Presumably, this is the basis for the Department's assertion that it has been "consistently conservative" in its estimates. However, there is no evidence to indicate whether this variance is attributable simply to a timing shift between the short- and long-term components of the aggregate loan guarantee liability, or if it means that the short-term component of the portfolio is performing better than originally estimated. In any event, we are required under generally accepted auditing standards to determine whether the estimate is reasonable within a tolerable range, not whether it is consistently conservative.
Our report cited an unexplained difference of $888 million between the loan receivable balance in Education's accounting records and amounts reported to Education by guaranty agencies. The Department believes it has adequately explained this difference and has adjusted its accounting records such that they now equal amounts reported by guaranty agencies. The Department states that the difference arose because of posting problems for collections in its general ledger system. We were informed that the analysis that made this determination was performed in 1992, but no documentation could be provided to support it. In the absence of this evidence, it is not possible for us to conclude that writing off the $888 million difference and adjusting to guaranty agency records was proper and supportable.
The Department generally agreed with our remaining findings and, after further analysis, they intend to develop a more comprehensive action plan to address them. We appreciate the opportunity to provide comments on the Department's response.
Very truly yours,
Price Waterhouse, LLP
August 16, 1996