Archived Information -- Fiscal Year 1997 Annual Accountability Report

Financial Management Objectives

The following elements of the Department's 1998-2002 Strategic Plan represent the key financial management objectives identified by the Department.

Goal 3 Objective 3.3: Postsecondary student aid delivery and program management is efficient, financially sound, and customer responsive.

The Department finances student loans through two major programs: the Federal Family Education Loan Program (FFEL) and the Direct Loan Program (DLP). Eligible institutions of higher education include public and private 2-year and 4-year institutions as well as vocational training schools. Schools may choose to participate in either program. Loans are available to students and their parents regardless of income, and borrowers with lower family incomes are eligible for higher interest subsidies.

The Department has collected longitudinal data showing that student loan recipients from low-income backgrounds tend to progress academically and attain college degrees at the same rate as middle-income students whose families have sufficient financial resources to avoid borrowing. Work continues on performance indicators for a broad spectrum of policy objectives that are comparable for both the direct and guaranteed programs. These indicators will measure efficiency, Federal costs, and financial management, as well as borrower and institutional satisfaction.

Overall student loan volume is expected to increase by almost 40 percent over the next five years. In 1998, net lending is expected to be $27 billion, and is expected to increase to $37 billion by 2002. This projected increase is caused by steadily rising educational costs, higher loan limits, and a growing population of eligible borrowers.

The FFEL program provides loans to students and parents through a complex administrative structure involving approximately 5,800 lenders, 36 state and private guaranty agencies, and 4,300 participating schools. Under the FFEL program, banks lend private capital to students and parents, guaranty agencies insure the loans, and the Federal Government reinsures the loans against borrower default. In addition to paying for defaults, the Department provides interest and administrative subsidies to banks and guaranty agencies.

The Department's DLP was authorized by the Student Loan Reform Act of 1993 to enable students and parents to obtain and repay loans more easily than was possible under the FFEL program. Now, the Department provides loans directly to borrowers with funds borrowed from Treasury.

As required by the Federal Managers' Financial Integrity Act (FMFIA), management has identified seven problem areas in the Department's management controls. Five of the seven areas involve SFA programs. All seven areas are discussed in more detail in the "Highlights of Reporting Requirements" section of this report.

Loan Volume Chart The Department is currently developing a management plan for Student Financial Aid Programs. The objective of the plan is to evaluate and redesign the business process to streamline and improve program operations and provide for:
  • improved customer service for all recipients;
  • significant reduced costs in management and delivery of the programs;
  • reduced paperwork and reporting for recipients;
  • improved cash management;
  • improved data quality;
  • improved program management; and
  • the ability to collect accurate, timely, complete, reliable, and consistent information.

The Department has the following specific goals for Student Financial Aid Programs:

Guaranty Agencies: To improve accountability for the guaranty agencies activities, the Secretary's agreements with guaranty agencies will be revised and will be subject to periodic recertification. They will include specific, publicly released performance information--confirmed by reliable audits--to ensure the submission of timely, accurate, and consistent data for management purposes. The Secretary will have authority to move to a system of performance-based contracts for the administration of the guaranty, rather than designate intermediary agencies.

Default Costs: The Department continues to work to reduce default costs and to eliminate excessive subsidies to lender and guaranty agencies. Through its legislative proposals, it attempts to reduce defaults through revised incentives to lenders and guaranty agencies, and increased lender risk-sharing (from 2 % to 5 %).

In the "gatekeeping" operation, the process for certifying schools for eligibility for Federal student aid, the Department is identifying high-risk institutions and targeting its regulatory and enforcement efforts on these institutions. Approximately 33% of initial applications to student aid programs have been rejected in the last three years. Improved institutional oversight by the Department has led to the removal of 875 schools, including 672 schools from all student aid programs and an additional 203 from federal loan programs.

More than 1,000 schools of questionable capacity have been placed on provisional certification during the past four years so that the Department can move quickly to remove them from participating in the student aid program should problems arise.

In fiscal year 1997, the Postsecondary Education Participants System (PEPS) was modified to track school submissions of required audit reports and the status of audit findings at institutions. This enhancement was done to resolve concerns found during the FMFIA review that the Department did not assure that schools submitted required audit reports and that all misspent funds were recovered.

IT Systems: In accordance with requirements of the Clinger-Cohen Act, the Department is engaged in an extensive review of its information technology systems needed to manage the student loan programs and to ensure that investments in these systems are cost effective and provide high quality service to users.

Last fall, the Department initiated a Student Financial Assistance Modernization Board to assist Secretary Riley in ensuring effective management of the Federal student aid programs. The Modernization Board is composed of senior Federal officials from across the government, who draw upon broad-based public and private-sector expertise in managing and modernizing large data and delivery systems, Federal procurement and contracting, and information technology.

The Modernization Board advises the Secretary on such issues as changing contracting practices to improve access to high-quality private-sector services, short- and long-term planning for the modernization of the Department's information technology systems, simplifying program administration, and developing plans based on best industry practices for improving customer service and reducing costs.

Loan Data Quality: A key to properly managing the guaranteed and direct loan programs is access to accurate information regarding the program portfolios. The Department has established a goal to improve the accuracy and integrity of data supplied by applicants, institutions, lenders, and guaranty agencies. The central system for data collections is the National Student Loan Data System (NSLDS), which is populated with data supplied by guaranty agencies, institutions, outside servicing institutions and the Department's own debt collection service. This system includes over 2 billion records of detailed student loan history and is used extensively in administering our loan programs. NSLDS collects data on some 35 million students and is used by 6,200 schools. In the past four years, NSLDS has helped to prevent the potential award of as much as $850 million in loans and $172 million in Pell Grants to students who were ineligible for additional federal aid because of prior defaults or grant over-payments.

NSLDS data quality improved significantly during 1997. Edit failure rates decreased from 15 percent to 3.6 percent during the year. Further improvement is expected in other areas as the effort to increase the accuracy and integrity of data supplied by outside parties continues.

Goal 4 Objective 4.2: Our partners have the support and flexibility they need without diminishing accountability for results.

CaAROI Team Members with Secretary Richard W. RileyCooperative Audit Resolution and Oversight Initiative (CAROI)
The Department has been working with states and school districts to provide support and flexibility to implement legislative requirements without impairing accountability for results. Since its inception in July 1995, the Cooperative Audit Resolution and Oversight Initiative (CAROI) has used four strategies to advance this objective: (1) creating and maintaining dialogue with states, (2) working with states to address audit findings that are open or under appeal, (3) improving the process used in single audits of federal aid recipients (annual or biennial evaluations of financial operations and compliance requirements of all major programs in accordance with the Single Audit Act), and (4) coordinating within ED the resolution of audit findings with monitoring site visits and technical assistance.
Increased number of CAROI states
CAROI has been an important instrument for the Department's dialogue with states on a variety of monitoring and audit issues. A measure of its success has been its growth from three pilot states that agreed in 1995 to take part in CAROI (Florida, Mississippi, and Washington) to 10 states in 1997 (see table). That number is expected to grow to 25 by FY 1999. Key to the success of CAROI has been the use of a consensus building process for addressing audit findings involving program staff, auditors, financial managers, and legal advisers. In lieu of an adversarial approach, where ED issues unilateral audit determinations that are appealed and then negotiated, CAROI works concurrently at effecting a consensus among all parties needed to reach an agreement that will be longstanding.
CAROI States Line Graph
Identify Recurrent Issues
CAROI has identified recurrent issues experienced by a number of states and school districts. In FY 1996 working closely with auditors and state officials, CAROI provided timely and helpful guidance that state and school administrators used to submit applications and manage programs authorized by the Improve America's Schools Act (IASA) of 1994. To streamline the audit process, ED also coordinated revisions of the IASA Compliance Supplement. During the same year, CAROI tackled time distribution, a longstanding record keeping issue in many states where staff have responsibilities for multiple programs that are paid from a variety of federal, state, and local funds. The Department used flexibility provided by the recently modified OMB Circular A-87, Cost Principles for State and Local Governments, to allow Florida's Department of Education to approve a substitute system that would reduce the regulatory burden of accounting for federal vocational and adult education funds. By 1997, that approach had been expanded to the state education agencies in North Carolina, Illinois, and California. In the same year Maryland began talks with ED to apply the approach to its state agencies.

In FY 1997, the CAROI approach was applied to several other issues. With the state of Washington, ED effected agreement on a variety of issues involving discretionary grants and the vocational education program. ED also provided technical assistance to Arizona and Colorado to ensure flexibility in implementing a number of programs authorized by the Elementary and Secondary Education Act. After extensive discussions involving auditors, attorneys, and financial staff, Massachusetts agreed to pay ED $2.1 million to resolve maintenance of effort issues involving vocational education.

In the most complex case to date, a number of ED offices opened dialogue in 1997 with the Commonwealth of Pennsylvania on recurrent issues spanning four fiscal years (maintenance of effort and equitable allocation of costs to federal programs) that had resulted in four appeals involving many millions of dollars, and three major ED programs. By February 1998, agreement had been reached to close 119 findings. Writing to Secretary Riley, Harvey Eckert, Pennsylvania's Deputy Secretary for Comptroller Operations, praised CAROI for "help(ing) everyone understand the importance of audits as a management tool. Decisions made during resolution can now be used by federal and state agencies to improve program effectiveness, avoid repeat findings, and avoid the high cost of litigation."

The committee that manages CAROI has coordinated the delivery of technical assistance and monitoring with other ED offices. In addition, committee members have been active in program coordination reviews involving several program offices, and have taken part in a number of site visits to address a range of program issues and audit concerns, including (in FY 1997) New York, West Virginia, and (in FY 1998) Wisconsin and New Mexico.

Goal 4 Objective 4.4: Our information technology investments are sound and used to improve impact and efficiency

Information Technology Investment Review Board (ITIRB) The Department established an ITIRB to ensure all major information systems are mission justified. The ITIRB evaluates Department business processes to ensure information technology (IT) projects are designed and implemented to deliver services most efficiently. The ITIRB reviews the progress of ongoing IT initiatives and evaluates performance and outcomes. This includes addressing the need for all major information systems to become Year 2000 compliant, maintaining network and web support, assuring risk management, purchasing services, and continuing to reduce paperwork burden. As its basic investment guidance, the ITIRB uses a Department-wide Information Technology Architecture (ITA) derived from business requirements identified in the Strategic Plan. The ITA helps define the future operating environment of the Department and steers the migration plan to address this new environment.

Goal 4 Objective 4.6: Management of our programs and services ensures financial integrity

The Department continues to invest in technology to improve financial management and accountability for taxpayer dollars. Our new core financial management system, the Education Department Central Automated Processing System (EDCAPS), is fully operational. EDCAPS integrates the payments, grants and contracts, and accounting systems into one system that supports a streamlined grant process, facilitates improved procurement processes, and allows the Department to conduct business electronically.

EDCAPS cap and tassleThe Department implemented the final phase of the Grants Administration and Payments System (GAPS) in May 1998. GAPS supports the entire grant life cycle and provides recipients with improved payment processing. GAPS enables recipients to manage awards with on-line current information on all grants and draw funds through the Internet.

EDCAPS will facilitate the timely reconciliation of accounts and financial statement balances. EDCAPS is the Department's commitment to implement a financial management system which provides timely and reliable data. The two material weaknesses related to Fund Balances with Treasury and Financial reporting will be corrected during the current fiscal year with the implementation of EDCAPS and corresponding business processes.

Audit Results
As a key indicator of the Department's ability to manage the financial integrity of its programs, a goal was set that independent auditors will issue a clean opinion on the Department-wide annual financial statements every year. For the past three years, the Department has received disclaimers of audit opinions, in large part, because of concerns with the integrity of data supporting cost estimates for the FFELP.

As a result of an improved loan loss estimate, the Department received an unqualified opinion for Fiscal Year 1997. The Department used data supplied directly by Guaranty Agencies, an enhanced cash flow model, and improved mathematical approaches. These refinements resulted in auditable loan related estimates, and the elimination of the barrier to an unqualified opinion.


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