NOTE 1 - ORGANIZATION AND REPORTING ENTITY
These consolidated principal financial statements present the financial position and activity of the U.S. Department of Education (Department), a cabinet-level agency of the Executive Branch of the United States Government. The Department's financial activity relates to execution of its congressionally approved budget and programs which include the Federal Family Education Loan Program (FFEL) and William D. Ford Direct Loan (DLP) programs. The FFEL Program, authorized by the Higher Education Act of 1965, as amended (HEA), operates with state and private non-profit 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 DLP, authorized by the Student Loan Reform Act of 1993, is a direct lending program in which loan capital is provided to individual students by the federal government through borrowing from the U.S. Treasury.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These financial statements report the consolidated 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 and the Government Management Reform Act of 1994. These statements are prepared in accordance with the Office of Management and Budget (OMB) Bulletin 94-01, Form and Content of Agency Financial Statements, and required portions of subsequent OMB Bulletin 97-01 Form and Content of Agency Financial Statements. These Bulletins establish a hierarchy of accounting principles and standards which require compliance with the accounting policies in eight Statements of Federal Financial Accounting Standards (SFFASs) approved by the Secretary of the Treasury, the Director of the OMB, and the Comptroller General. This hierarchy of accounting principles and standards constitutes an "other comprehensive basis of accounting".
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.
Basis of Accounting
Transactions are recorded on an accrual basis. Revenues are recognized when earned and expenses are recognized when incurred.
In fiscal year 1997 the Department had the data provided by ten large guaranty agencies validated in support of its loan loss estimation methodology. This loan estimation process is described in note 4 of the financial statements. Previously, the Departments estimation methodologies were based on assumptions which used data that could not be sufficiently validated. The Department retroactively adjusted calculations for its loan estimates for fiscal year 1996. The effect on the fiscal 1996 balance sheet is as follows (in thousands):
|Credit program receivable, net|
|$ 11,525,457||$ 11,923,345|
|$ 4,138,037||$ 9,305,308|
|Estimated liabilities for loan guarantees||$ 14,667,681||$ 12,996,459|
|Net position||$ 24,376,100||$ 31,612,481|
Basis of Consolidation
The accompanying financial statements are consolidated to include the accounts for all programs which the Department is responsible. All interprogram balances within the Department 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 Treasury borrowing from the Public, in part attributable to the Department. Liabilities for certain employee benefits administered by the Office of Personnel Management and the Department of Labor specifically allocable to the Department are included.
Budgets and Budgetary Accounting
Budget authority is the authorization provided by law for the Department to obligate for future outlays of federal funds. The Department's budgetary resources as of September 30, 1997 include current authority (appropriations and borrowing authority) and unobligated balances remaining from multi-year and no-year budget authority received in prior years. Budgetary resources include reimbursements received and other income (spending authority from offsetting collections credited to an appropriation or fund account) and adjustments (recoveries of prior year obligations). Pursuant to Public Law 101-510, unobligated balances associated with appropriations expiring at the end of the fiscal year remain available only for obligation adjustments, until the account is canceled five years after it expires.
Financing Sources and Program Revenues
The Departments programs are generally funded with congressional appropriations. Borrowing from the Treasury provides most of the funds for loans made under the DLP and Facilities Loan Program. The appropriation activities are recorded in the Statement of Operations and Changes in Net Position.
Other revenues are recognized when payments become payable to the Department from other agencies and from the public in exchange for goods and services rendered to others. Major sources of reported revenues include interest accrued from DLP borrowers on outstanding loans receivable and interest accrued from Treasury on uninvested fund balances. Fees received on student loans, such as loan origination fees, are offset against subsidy costs.
Subsidy Estimates and Re-estimates
The Federal Credit Reform Act of 1990 (CRA) requires agencies to measure the total costs of federal credit programs at the time a loan is committed. CRA requires credit programs to be on a budgetary basis equivalent to other federal spending and 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 the Department conform with the provisions of CRA. 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 (interest subsidies, defaults, fee offsets, certain administrative expenses and other cash flows) associated with direct loans and loan guarantees in the year loans are disbursed. In addition, the net present value of these subsidy costs are recorded as an allowance (reduction) for direct loans receivable or as a liability for loan guarantees. See note 4.
Subsidy costs are estimated based on the difference between the present values of expected government cash outflows (net interest expense and defaults) and inflows (collections), discounted by the interest rate earned by a Treasury debt instrument of similar term at the time loans are disbursed. Subsidy costs are recognized as expenses in the year loans are disbursed. Subsidy costs of credit program loans are re-estimated each year which is recognized as an increase (decrease) of subsidy expense.
Fund Balances with U.S. Treasury
The Fund Balances with U.S. Treasury are revolving funds, appropriated funds and undisbursed U.S. Treasury borrowings available to pay current liabilities and to finance loan programs. The Department has the authority to disburse U.S. Treasury funds directly to agencies and institutions participating in its programs. Other cash receipts and disbursements are processed by the U.S. Treasury. A portion of the appropriated funds included at September 30, 1997 were forward-funded by multi-year appropriations for expenditures anticipated during the year ending September 30, 1998. The Department does not have any restricted cash balances. Fund Balances with U.S. Treasury do not include any non-entity funds.
Credit Program Receivables
All credit program receivables are recorded at the principal outstanding, net of allowances for subsidy cost or uncollectible receivables (net present value). Credit programs include the FFEL, DLP, and the Facilities Loan Program. Allowances for subsidy cost and estimated liabilities for loan guarantees represent the differences between the present values of estimated net cash inflows and outflows of the underlying credit program loans. The allowance for subsidy cost is amortized using the effective interest method based on the interest rate at the time credit program loans were disbursed.
Defaulted Loans Collections
The Defaulted Loans Collected line in the Statement of Cash Flows includes all payments received from borrowers and lenders for FFEL and Facilities Loan Program defaulted loans, either collected through a Guaranty Agency, collection agency, Internal Revenue Service, or directly by the Department. These collection amounts also include payments received for consolidation of FFEL defaulted loans. It is the Departments policy to record these consolidations as collections because the old FFEL loan is paid in full and a new loan is created. In fiscal year 1997, these consolidations totaled approximately $460 million, or approximately 21.1%, of the total defaulted loans collected.
Accounts receivable are due from recipients of grant and other financial assistance programs, and other federal agencies. Accounts receivable are recorded at the net realizable amounts.
Guaranty Agency Reserves
Guaranty agency reserves consist of the Departments interest in the net assets of state and non-profit FFEL program guaranty agencies. Guaranty agency assets include initial federal start-up funds (guaranty agency advances), receipts of federal reinsurance payments, insurance premiums, guaranty agency share of collections on defaulted loans (18.5, 27, or 30 percent), investment income and administrative cost allowances and other assets purchased out of reserve funds. Liabilities result from lender claims, operating expenses and federal reinsurance fees. Guaranty agency reserves are recorded as non-entity receivable asset and as a liability due to U.S. Treasury.
Liabilities represent the amount of funds or other resources likely to be paid by the Department as a result of transactions or events which have already occurred. No liability can be paid by the Department, absent an appropriation or budgetary authority. Liabilities for which an appropriation has not been enacted are classified as liabilities not covered by budgetary resources (unfunded liabilities). Most of FFEL and DLP liabilities result from entitlements covered by permanent authority and the Department 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.
Liabilities for loan guarantees under the FFEL program include provisions for payment of loan defaults, interest subsidies, lender compensation for below market interest rates, administrative expense allowances, supplemental preclaims assistance and interest expense. These liabilities are offset by estimated future collections on defaulted loans, loan origination fees paid by borrowers and fees paid by lenders. See note 4.
Accrued Grant Liability
Disbursements of grant funds are made when requested by recipients and recorded as advances. Subsequent to the disbursements to the grantees, the grantees report program expenditures. Funds disbursed by the Department are recorded as advances until the recipient reports expenditures. The accrued grant liability represents estimated amounts of expenditures in excess of advances at September 30, 1997 based on historic draw down and expenditure reporting.
Borrowing from the U.S. Treasury
Borrowings from the U.S. Treasury provide funding for loans in the DLP and Facilities Loan Programs. Principal repayments are made to U.S. Treasury based on the 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 at the end of each fiscal year.
Annual, Sick and Other Leave
Annual leave is accrued as it is earned and 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 and Other OPM Administered Employee Benefits
The majority of the Departments 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. The Department does not report CSRS or FERS assets for its employees. Liabilities not covered by budgetary resources are reported for the accrued normal service cost accruing for current employees.
Federal Employees Compensation Act
The Department accrues the portion of estimated liability for disability benefits assigned to the agency under the Federal Employees Compensation Act (FECA), administered and determined by the Department of Labor (DOL). The liability, based on the net present value of estimated future payments determined in a study conducted by DOL, is provided for under future funding requirements.
Net position is the residual difference between assets and liabilities. It is comprised of unexpended appropriations, invested capital, future funding requirements and donations. Unexpended appropriations include undelivered orders.
Invested capital includes amounts advanced to guaranty agencies 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 the Department's liabilities for accrued leave, pension and FECA benefits, not covered by available budgetary resources.
NOTE 3 - FUND BALANCES WITH U.S. TREASURY
Fund balances with the U.S. Treasury at September 30, 1997 were composed of the following (in thousands):
|Forward funded - appropriations||$ 17,648,565||$ 2,737,055||$ 20,385,620|
|Current year - appropriations||$ 8,502,464||$ 632,122||$ 9,134,586|
|Current Year - revolving funds||1,049,392||8,167,377||9,216,769|
|Current Year - trust funds||23||107||130|
|Total appropriated balances||$ 27,200,444||$ 11,536,661||$ 38,737,105|
|Deposit funds||$ 926,676|
|Budget clearing accounts||$ 117,044|
NOTE 4 - LOANS AND LOAN GUARANTEES
A. Loan Programs: The Department provides loans to students and parents through two major programs: the FFELP and the DLP. Loans are made to individuals who meet statutorily set eligibility criteria and attend eligible institutions of higher education, which include public and private two and four year institutions, graduate schools and vocational training schools. Loans are available to students and their parents regardless of income and student borrowers who demonstrate financial need receive federal interest subsidies.
Under the FFELP over 5,800 private lenders make loans directly to students and parents. These loans are guaranteed by the federal government against default, with 36 state or private non-profit guaranty agencies acting as intermediaries in administering the guaranty. (Lenders are responsible for a share of the cost of each default (2 percent); guaranty agencies also pay a portion of the cost of each defaulted loan from federal funds they hold in trust, up to 22 percent.) FFELP lenders receive federal interest subsidies if current market interest rates exceed the statutorily set interest rates on the student loans. Guaranty agencies (GAs) receive annual administrative cost allowance payments, the formula for which is also set in statute.
Under the DLP, which was authorized by the Student Loan Reform Act of 1993, the Federal government provides loan capital directly to students and parents through participating schools.
B. Types of Loans: Under either program, four types of loans are provided:
Stafford loans are subsidized loans to students, eligibility for which is based on financial need. The Department pays the interest while the student is in school and during certain subsequent grace and deferment periods. Interest rates for these loans are reset each year based on a statutory formula, with a cap of 8.25 percent.
Unsubsidized Stafford loans are unsubsidized loans to students. Except for the lack of interest subsidies, the terms and conditions of these loans are identical to Stafford Loans.
PLUS loans are unsubsidized and available to parents of dependent undergraduate students. These rates are also reset each year, with a cap of 9 percent.
Consolidation loans allow borrowers with multiple student loans to combine their obligations and extend their repayment schedules.
All of the loans, if not defaulted or if defaulted and held by GAs, accrue interest on a regular basis. Once the loan is transferred to the Department, interest on defaulted loans is not accrued which is recorded in the general ledger.
C. The Direct Loan and Guaranteed Loan Program Estimation Method: The Department estimates the amount of loss it will incur on future defaults of FFELP and DLP loans. The estimates are recorded as allowance for subsidy cost, a reduction of the direct loans outstanding and as a liability for the guaranteed loans.
D. (1) Credit Reform Requirements: All credit programs within the Department conform with the provisions of CRA. CRA, SFFAS No. 2, Accounting for Direct Loans and Loan Guarantees, and related regulations and guidance, require that the net present value of subsidy costs (interest subsidies, defaults, fee offsets, and other cash flows) associated with direct loans and loan guarantees for a given year be recognized as an expense in the year the loans are disbursed. In addition, re-estimates of prior year cohorts are done every year and the resulting difference from prior estimates is included as subsidy expense. Cumulative estimates of subsidy costs associated with all outstanding loans are used to develop allowances for direct loans receivable and defaulted guaranteed loans and a liability for loan guarantees.
(2) Departments General Approach to Estimation: To comply with CRA and related requirements, the Department employs a computer-based cash flow projection model. As required by CRA, the model is used to compute FFELP loan guaranty liability, the DLP allowance for subsidy cost and the net present value of defaulted FFELP loans receivable.
The Department estimates cash flows over the life of a loan by loan type described previously, aggregating the loans by loan type, cohort year, and risk group. Cohort year for the loan represents the year the direct loan is obligated or the loan is guaranteed, regardless of the timing of disbursements. Risk groups include students at 1) two-year colleges, 2) four-year colleges and graduate schools, and 3) proprietary schools.
(3) Significant Assumptions: The Department makes several assumptions in calculating the liability for loan guarantees and DLP and FFELP allowances. The significant assumptions for the estimated future cash flow include: repayment distribution, default rates and distribution, default collection rates and distribution, and projected interest rates. Because of uncertainties inherent in these assumptions, it is reasonably possible the subsidy costs of FFELP guarantees and DLP loans issued through September 30, 1997, will be further revised in the near term.
D. Credit Program Receivables, at September 30, 1997, comprised the following (in thousands):
|Loans receivable||$ 22,547,225||$ 19,617,456||$ 611,680|
|Gross program receivables||23,020,592||22,585,501||621,059|
|Less: allowance for subsidy||(1,212,768)||(12,305,514)||(127,136)|
|Net program receivables||$ 21,807,824||$10,279,987||$ 493,923|
E. Subsidy Costs for FFELP and DLP: For the fiscal year ended September 30, 1997, loan guaranty subsidy expenses were (in thousands):
|Provision for loan defaults (net of recoveries)||$ 2,771,770|
|Provision for interest subsidies||113,415|
|Mandatory administrative expense||650,035|
|Less: total re-estimates||(1,180,694)|
For the fiscal year ended September 30, 1997 DLP subsidy expenses were (in thousands):
|Loan defaults (net of recoveries)||$ 364,016|
F. Guaranteed Loans Outstanding:
As of September 30, 1997, the total outstanding guarantees were approximately $101 billion. An additional $6 billion in gross commitments to guaranty loans was outstanding at September 30, 1997. If all of the loans currently guaranteed defaulted, the Department would not pay the full guaranteed amount to the guaranty agencies. Instead, the Department would actually pay a smaller amount due to the reinsurance rates, which ranges from 98 - 78 percent of the amount paid to the lender depending on the default rate for the GA. Currently, the majority of guaranty agencies are reimbursed at the 98 percent reinsurance rate.
G. Liability for Loan Guarantees: The estimated loss on guaranteed loans at September 30, 1997, is as follows (in thousands):
|Pre-1992 Guarantees, Present Value||$ 1,482,757|
|Post-1991 Guarantees, Present Value||$ 11,816,338|
|Total Loan Guarantee Liability||$ 13,299,095|
NOTE 5 - 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 for non-contractual modifications made to its loan guarantees. The non-contractual modifications were:
$The Emergency Unemployment Compensation Act of 1991 authorized the Department to continue collecting on defaulted loans through the Internal Revenue Service (offsetting income tax refunds); such authority had been due to expire in fiscal year 1994. The Act also authorized the use of wage garnishment as a collection tool for defaulted loans.
$The HEA Amendments of 1992 eliminated the statute of limitations on collection activities for certain student loans.
The FFEL Program repays the borrowing, at an annual interest rate of 7.37 percent, with increased collections on defaulted loans resulting from the non-contractual modifications. During the fiscal year ended September 30, 1997 the FFEL Program used collections to reduce this U.S. Treasury debt as follows (in thousands):
|Beginning balance borrowing from U.S. Treasury||$ 680,222|
|Payments to U.S. Treasury during fiscal year 1997||(326,149)|
|Ending balance borrowing from U.S. Treasury||$ 354,073|
The aggregate maturities of this debt, based on estimated collections on defaulted loans, for the years subsequent to September 30, 1997 are as follows (in thousands):
Borrowing for Credit Programs, Repayments and Write-offs
The Department funds the DLP and the Facilities Loan Programs through borrowings from the U.S. Treasury. The borrowings are authorized through an indefinite permanent authority at interest rates set each year by the U.S. Treasury. The interest rate for borrowing as of September 30, 1997 was 6.7 percent. Funded borrowings, repayments and write-offs at September 30, 1997 were (in thousands):
|Direct Loans||All Other||Total|
|Borrowings from U.S. Treasury, beginning||$ 12,354,721||$ 498,063||$ 12,852,784|
|New borrowings||$ 11,333,219||$ 5,838||$ 11,339,057|
|Borrowings from U.S. Treasury, ending||$ 22,713,060||$ 464,532||$ 23,177,592|
C. Interest Revenues and Expense
Interest expense, federal, comprises the interest accrued on borrowings from the Treasury and interest expense recognized to offset interest earned on uninvested funds. Federal interest revenues and expense during fiscal years ended September 30, 1997 are summarized as follows (in thousands):
|Direct Loans||FFEL||All Other||Total|
|Interest revenues, Federal||$ 552,795||$ 558,546||$ 510||$ 1,111,851|
|Interest expense, Federal:|
|Borrowings for credit programs||$ 1,598,639||$ 13,502||1,612,141|
|Total interest expense, Federal||$ 1,598,639||$ 608,677||$ 13,502||$ 2,220,818|
NOTE 6 - SALARIES AND ADMINISTRATIVE EXPENSES
Salaries and administrative expenses by object classification for the year ended September 30, 1997 (in thousands):
|Salaries and benefits||$ 357,707|
|Travel and transportation||11,538|
|Rent, communications and utilities||73,344|
|Printing, reproduction, material, supplies |
and non-capital equipment
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Department can assist guaranty agencies experiencing financial difficulties with 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 occurrences is uncertain and cannot be estimated with sufficient reliability.
Perkins Loans Reserve Funds
The Perkins Loan Program is a campus-based program providing financial assistance to eligible postsecondary school students based on financial need. The Department provides funds to participating schools to provide about 87 percent of the capital used to make loans to eligible students at 5 percent interest. The other 13 percent of program funding is provided by the institution. For the latest academic year (ended June 30, 1997) there were approximately 673,000 loans made, totaling about $1.02 billion at approximately 2,100 institutions, averaging $1,515 per loan.
At June 30, 1997 the Department's share of the Perkins Loan Program was approximately $5.76 billion. These funds are not reported in the financial statements of the Department because the extent to which they may be recoverable is uncertain and cannot be estimated with sufficient reliability.
Approximately $1.26 billion of non-credit program claims, for which collection probabilities have not yet been established, are being actively pursued by the Department at September 30, 1997 as claims-in-process. The estimated net realizable value of claims-in-process at September 30, 1997 is approximately $35 million. This amount consists of claims in various stages in the legal process and the ultimate value cannot currently be determined with reasonable certainty, and is not recognized in the financial statements.
Borrower Class Actions
The Department is involved in pending litigation challenging the enforceability of FFEL Program loans made to students who attended various closed trade schools. In most instances, a large percentage of the loans in question are in default and have been acquired by guaranty agencies
and/or the Department. 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 the Department's potential loss exposure is uncertain and cannot be estimated with sufficient reliability.
Results from Inspector General Activities
During fiscal year 1997 the Inspector General recommended and the Department has sustained certain amounts in the categories of questioned costs, unsupported costs and better use of funds resulting from audits. Questioned costs are audit findings indicating that federal funds were misspent by recipients and should be repaid to the Department. Unsupported costs are audit findings that expenditures of federal funds are not supported by documentation required to be maintained by program recipients. Better use of funds are findings that eliminating certain activities and replacing them with others having stronger impact on the Departments mission could improve overall operating efficiency.
For questioned costs and unsupported costs, any amounts recovered through due administrative process are generally credited to miscellaneous receipts and therefore become revenues of the federal government as a whole, rather than the Department. Amounts identified by the Inspector General and sustained within the Departments Office of the Chief Financial Officer and Chief Information Officer (OCF & CIO), Office of Educational Research and Improvement (OERI), Office of Elementary and Secondary Education (OESE), Office of Postsecondary Education (OPE), Office of Special Education and Rehabilitative Services (OSERS) and Office of Vocational and Adult Education (OVAE) are summarized for the year ended September 30, 1997. Results of Inspector General Activity for the Federal Government follows (in thousands):
|Principal Office||Questioned costs||Unsupported costs||Better Use of Funds|
|OCF & CIO||$ 920||$ 0||$ 7,665|
|Total||$ 217,308||$ 92||$ 116,710|
The Department is involved in various other claims and legal actions related to its programs, arising in the ordinary course of business. In addition, some portion of current year financial assistance expenses (grants) may include funded recipient expenditures which were subsequently disallowed through program review or audit processes. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Departments financial statements.
NOTE 8 - RESTATEMENT
The Department restated its loan loss liability and credit program receivables for guaranteed loans and its allowance for subsidy cost for direct loans due to the availability of validated data as follows:
|Net position, as previously stated at October 1, 1996||$ 24,376,100|
|Net position, as restated at October 1, 1996||$ 31,612,481|