Required

Supplementary
Stewardship
Information

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 REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION

Stewardship Expenses

In the Department of Education, discretionary predominantly state and local role. Of the
spending constitutes approximately 58 percent estimated $909 billion being spent nationwide
of the budget and includes nearly all programs, on education at all levels for school year 2005–
the major exceptions being student loans and 2006, about 90 percent comes from state, local,
rehabilitative services. While spending for and private sources. The federal contribution to
entitlement programs is usually a function of the national education expenditures is about
authorizing statutes creating the programs and is $90.9 billion. The federal contribution includes
not generally affected by appropriations laws, education expenditures not only from the
spending for discretionary programs is decided Department of Education, but also from other
in the annual appropriations process. Most federal agencies such as the Department of
Department programs are discretionary. Health and Human Services’ Head Start
Program and the Department of Agriculture’s
Education in the United States is primarily a
School Lunch Program.
state and local responsibility. States,
communities, and public and private The Department’s $99.8 billion appropriation is
organizations establish schools and colleges, 11.0 percent of total education expenditures in
develop curricula, and determine requirements the United States and 3.7 percent of the federal
for enrollment and graduation. The structure of government’s $2.7 trillion budget in fiscal year
education finance in America reflects this 2006.

Investment in Human Capital

Office of Federal Student Aid. The Office of Office of Special Education and
Federal Student Aid administers need-based Rehabilitative Services. The Office of Special
financial assistance programs for students Education and Rehabilitative Services supports
pursuing postsecondary education and makes state and local programs that assist in educating
available federal grants, direct loans, guaranteed children, youth, and adults with special needs to
loans, and work-study funding to eligible increase their level of employment, productivity,
undergraduate and graduate students. independence, and integration into the
community. Funding is also provided for
Office of Elementary and Secondary
research to improve the quality of their lives.
Education. The Office of Elementary and
Secondary Education provides leadership, Office of Safe and Drug-Free Schools. The
technical assistance, and financial support to Office of Safe and Drug-Free Schools supports
state and local educational agencies for the efforts to create safe and violence-free schools,
maintenance and improvement of preschool, respond to crises, prevent drug and alcohol
elementary, and secondary education. Financial abuse, ensure the health and well-being of
assistance programs support services for students, and teach students good citizenship and
children in high-poverty schools, institutions for character. Special character and civic education
neglected and delinquent children, homeless initiatives are funded to reach those in state and
children, certain Indian children, children of local correctional institutions. Grants emphasize
migrant families, and children who live on or coordinated, collaborative responses to develop
whose parents work on federal property. and maintain safe, disciplined, and drug-free
Funding is also provided to increase the learning environments.
academic achievement of students by ensuring
Office of Innovation and Improvement. The
that all teachers are highly qualified to teach.
Office of Innovation and Improvement makes

FY 2006 Performance and Accountability Report—U.S. Department of Education 135

REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION

strategic investments in educational practices Native, Native Hawaiian Pacific Islander, and
through grants to states, schools, and community immigrant backgrounds. Grants pay the federal
and nonprofit organizations. The office leads share of the cost of model programs for the
the movement for greater parental options such establishment, improvement, or expansion of
as charter schools. Further, the office supports foreign language study in elementary and
special grants designed to raise student secondary schools.
achievement by improving teachers' knowledge
Office of Vocational and Adult Education.
and understanding of and appreciation for
The Office of Vocational and Adult Education
traditional U.S. history.
funds academic, vocational, and technical
Institute of Education Sciences. The Institute education for youth and adults in high schools,
of Education Sciences compiles statistics; funds community colleges, and regional technical
research, evaluations, and information centers. Educational opportunities are provided
dissemination; and provides research-based for adults over the age of 16, not currently
guidance to further evidence-based policy and enrolled in school, who lack high school
practice focused on significant education diplomas or the basic skills to function
problems. Research programs examine effectively as parents, workers, and citizens.
empirically the full range of issues facing
Office of Postsecondary Education. The
children and individuals with disabilities,
Office of Postsecondary Education provides
parents of children with disabilities, school
grants to colleges and universities to promote
personnel, and others. The National Library of
reform, innovation, and improvement in
Education is the largest federally funded library
postsecondary education; increased access to
devoted entirely to education and provides
and completion of postsecondary education by
reference and information services, collection
disadvantaged students; strengthening of the
and technical services, and resource sharing and
capacity of colleges and universities that serve a
cooperation.
high percentage of minority and disadvantaged
Office of English Language Acquisition. The students; and teacher and student development
Office of English Language Acquisition directs resources. The international programs promote
programs designed to enable students with international education and foreign language
limited English proficiency to become proficient studies and research. The office administers the
in English and meet state academic content and accrediting agency recognition process and
student achievement standards. Enhanced coordinates activities with states that affect
instructional opportunities are provided to institutional participation in federal financial
children and youths of Native American, Alaska assistance programs.

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Program Inputs Department’s staff of approximately 4,111 is

10 percent below the 4,566 employees who
The Department currently administers programs administered federal education programs in
affecting every area and level of education. The 2001. At the same time, the Department
Department’s elementary and secondary manages 40 percent more in funds in 2006 than
programs annually serve 15,500 school districts it did in 2001 when its human capital investment
and more than 52 million students attending over was only $38.7 billion. These staff reductions,
88,000 public schools and more than 28,000 along with a wide range of management
private schools. Department programs also improvements, have helped limit administrative
provide grant, loan, and work-study assistance to costs to less than 2 percent of the Department’s
more than 10 million postsecondary students. budget, ensuring that the Department delivers
While the Department’s programs and about 98 cents on the dollar in education
responsibilities have grown substantially over assistance to states, school districts,
the years, the Department itself has not. Since postsecondary institutions, and students.
No Child Left Behind was enacted in 2001, the

Summary of Human Capital Expenses

(Dollars in Millions) 2006 2005 2004 2003 2002

Federal Student Aid Expense

Direct Loan Subsidy $ 6,655 $ 5,211 $ (543) $ 4,716 $ 877
Guaranteed Loan Subsidy 28,062 9,863 8,516 2,509 3,988
Grant Programs 15,447 15,070 14,943 13,836 12,256
Salaries & Administrative 172 164 186 179 207
Subtotal 50,336 30,308 23,102 21,240 17,328
Other Departmental
Elementary and Secondary Education 21,710 22,940 21,188 19,493 16,127
Special Education & Rehabilitative Services 15,215 13,995 12,687 11,529 9,906
Other Departmental Programs 5,353 6,067 5,160 4,828 4,531
Salaries & Administrative 467 486 448 395 472
Subtotal 42,745 43,488 39,483 36,245 31,036
Grand Total $93,081 $73,796 $62,585 $57,485 $48,364

During the early fall of 2005, just as schools budget. As a result, the Department has directly
were opening, hurricanes Katrina and Rita affected the lives of schoolchildren, their
devastated the Gulf Coast. The Department’s teachers, their schools, and the local economies
investment in the rebuilding of the educational of hundreds of communities throughout the
systems of this region and the support provided United States. This investment, along with the
to the districts affected across the country are investments made by other federal programs,
reflected in the numbers above, representing represents one of the greatest educational efforts
almost 2 percent of the Department’s 2006 in the history of our country.

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REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION

Program Outcomes Over time, the returns of developing skills

through education have become evident.
Education is the stepping-stone to higher living Statistics illustrate the rewards of completing
standards for American citizens. Education is high school and investing in postsecondary
vital to national economic growth. But education.
education’s contribution is more than increased
productivity and incomes. Education improves Unemployment rate. Persons with lower levels
health, promotes social change, and opens doors of educational attainment were more likely to be
to a better future for children and adults. unemployed than those who had higher levels of
educational attainment. The September 2006
Economic outcomes, such as wage and salary unemployment rate for adults (25 years old and
levels, historically have been determined by the over) who had not completed high school was
educational attainment of individuals and the 6.4 percent compared with 4.2 percent of those
skills employers with four years of
expect of those high school and
entering the Unemployment Rate by Educational Level 2.0 percent for those
labor force. with a bachelor’s
12
Both individuals degree or higher.
and society as a 10
Younger people with
whole have
Percentage

8
No high only high school
placed increased 6 school diplomas tended to
emphasis on degree
have higher
4
educational High
unemployment rates
school
attainment as 2
degree than persons 25 and
the workplace 0
College over with similar
has become degree
levels of education.
93

94

95

96

97

98

99

00

01

02

03

04

05

06
19

19

19

19

19

19

19

20

20

20

20

20

20

20

increasingly
technological, Annual Income. As
and employers now seek employees with the of September 2006,
highest level of skills. For prospective the annualized median income for adults
employees, the focus on higher-level skills (25 years and over) varied considerably by
means investing in learning or developing skills education level. Men with a high school
through education. Like all investments, diploma earned $36,088, compared with
developing higher-level skills involves costs and $61,932 for men with a college degree. Women
benefits. with a high school diploma earned $26,052,
compared with $47,840 for women with a
Returns, or benefits, of investing in education college degree. Men and women with college
come in many forms. While some returns degrees earned 73.8 percent more than men and
accrue for the individual, others benefit society women with high school diplomas. Earnings for
and the nation in general. Returns related to the workers with college degrees have increased in
individual include higher earnings, better job the past year by 10.5 percent for women and
opportunities, and jobs that are less sensitive to 6.6 percent for men. These returns of investing
general economic conditions. Returns related to in education directly translate into the
the economy and society include reduced advancement of the American economy as a
reliance on welfare subsidies, increased whole.
participation in civic activities, and greater
productivity.

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 REPORT OF THE INDEPENDENT AUDITORS
AUDIT OPINION

Report
of the
Independent
Auditors

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AUDIT TRANSMITTAL

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AUDIT OPINION

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REPORT OF THE INDEPENDENT AUDITORS
AUDIT OPINION

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 REPORT OF THE INDEPENDENT AUDITORS
REPORT ON INTERNAL CONTROL

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REPORT ON INTERNAL CONTROL

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REPORT ON INTERNAL CONTROL

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REPORT ON INTERNAL CONTROL

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REPORT ON INTERNAL CONTROL

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REPORT ON INTERNAL CONTROL

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REPORT ON INTERNAL CONTROL

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REPORT ON INTERNAL CONTROL

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REPORT ON COMPLIANCE WITH LAWS AND REGULATIONS

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REPORT ON COMPLIANCE WITH LAWS AND REGULATIONS

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REPORT ON COMPLIANCE WITH LAWS AND REGULATIONS

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REPORT ON COMPLIANCE WITH LAWS AND REGULATIONS

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DEPARTMENT RESPONSE TO AUDIT REPORT

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DEPARTMENT RESPONSE TO AUDIT REPORT

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 Other
Accompanying
Information

FY 2006 Performance and Accountability Report—U.S. Department of Education

OTHER ACCOMPANYING INFORMATION
IMPROPER PAYMENTS INFORMATION ACT REPORTING DETAILS

Improper Payments Information Act

Reporting Details

The Improper Payments Information Act of 2002 new President’s Management Agenda program
(IPIA) and the Office of Management and initiative beginning in the first quarter of
Budget’s (OMB) Circular No. A-123, Appendix FY 2005 entitled Eliminating Improper
C, Requirements for Effective Measurement and Payments. Previously, the OMB tracked the
Remediation of Improper Payments, require Department’s IPIA activities with other financial
agencies to annually review and assess all management activities through the Improving
programs and activities to identify those Financial Performance initiative. The
susceptible to significant improper payments. establishment of a dedicated President’s
The guidance in OMB Circular No. A-123, Management Agenda initiative focused the
Appendix C, defines significant improper Department’s improper payments efforts. Under
payments as those in any particular program that the new initiative, the Department’s status and
exceed both 2.5 percent of program payments progress are tracked and reported to the OMB in
and $10 million annually. For each program quarterly scorecards.
identified as susceptible, agencies are required to
The Department has divided its improper
report to the President and the Congress the
payment activities into the following segments:
annual amount of estimated improper payments,
Student Financial Assistance Programs, Title I
along with steps taken and actions planned to
Program, Other Grant Programs, and Recovery
reduce them.
Auditing.
To facilitate agency efforts to meet the reporting
requirements of the IPIA, the OMB announced a

Student Financial Assistance Programs

Federal Student Aid operates and administers lenders, 35 loan Guaranty Agencies, and a
the majority of the Higher Education Act of number of private loan servicers to administer its
1965, as amended (HEA), Title IV1 Student programs. Except for funds received as an
Assistance (Title IV) programs for the administrative cost allowance, Federal Student
Department. In FY 2006, nearly $77 billion was Aid program funds received by a school are held
provided to students and families to help them in trust by the school for the students, the
overcome the financial barriers that make it Department, and, in some cases, for private
difficult to attend and complete postsecondary lenders and Guaranty Agencies.
education. Federal Student Aid administers a
The HEA and subsequent Department
variety of grants, loans, and loan guarantees
regulations to implement the law comprise a
through its financial assistance programs. The
succession of eligibility definitions, standards,
processes developed to administer the programs
requirements, tests, and other internal controls
are responsive to changes in statutes, the
designed to minimize the risk that improper
reauthorization of existing statutes, and the
payments will be made either to students or to
changing needs of educational institutions and
postsecondary or financial institutions. The law
their students.
provides criteria for an institution to be eligible
Title IV student assistance programs are large to participate in student financial assistance
and complex. Federal Student Aid relies on over programs and mandates the joint responsibility
6,100 eligible postsecondary institutions, 3,200 of a program integrity triad made up of state
educational agencies, accrediting agencies, and
1
the Department. This structure, while
Title IV is the portion of the Higher Education Act that empowering educational institutions to operate
authorizes and regulates various student financial aid
programs. programs based on area needs, can increase the
158 FY 2006 Performance and Accountability Report—U.S. Department of Education
 OTHER ACCOMPANYING INFORMATION
IMPROPER PAYMENTS INFORMATION ACT REPORTING DETAILS
risk of improper payments and pose oversight number of family members attending college,
and monitoring challenges for the federal adjusted gross income (AGI), U.S. income taxes
government. paid, and certain untaxed income and benefits
reported on the FAFSA. Schools are required to
Federal Student Aid engages in a continual
collect copies of income tax returns from
process of actively identifying new risks in the
applicants who file returns (and their parents, if
programs it administers. Noncompliance with
the applicant is a dependent student) to
statutes, regulations and policies, whether by
determine that AGI, income taxes paid, and
students, schools, lenders, Guaranty Agencies,
certain untaxed income and benefits amounts
or loan servicers, not only places Title IV funds
were correctly reported on the FAFSA. Any
at risk, but also erodes public trust in the
discrepancies detected during the verification
programs. To address these concerns, Federal
process must be corrected.
Student Aid has several initiatives underway to
identify real or potential risks for fraud, waste,
abuse, mismanagement, and inadvertent errors in Risk Assessment
the delivery of student financial assistance As required by the IPIA, Federal Student Aid
programs and funds. inventoried its programs during FY 2006, and
reviewed program payments made during
Controls Over Financial Aid Applications FY 2005 (the most recent complete fiscal year
available), to assess the risk that a significant
Over 13 million postsecondary school students
amount of improper payments were made. The
apply for federal student aid each year by
review identified and then focused on five key
completing the required Free Application for
programs (Federal Family Education Loan
Federal Student Aid (FAFSA). Information
Program, Federal Pell Grant Program, Federal
provided on the FAFSA is used to (1) calculate
Supplemental Educational Opportunity Grant
the expected family contribution (EFC), an
and Federal Work-Study Programs, and Direct
amount applicants and their families are
Loan Program), representing 98.7 percent of
expected to contribute to the cost of their
Federal Student Aid’s FY 2005 outlays.
postsecondary education expenses for a given
(Outlays in this context represent the amount of
award year, and (2) confirm eligibility through
money actually spent during a fiscal year.)
computer matches with other agencies. Unless
the application is rejected due to inconsistencies The criteria for determining susceptible risk
or inadequate information, the Department’s within the programs were defined as follows:
central processing system will automatically
• For those programs with annual outlays that
calculate the EFC. The HEA establishes the
did not exceed the OMB susceptibility
formula for the EFC calculation. The result is a
threshold of $10 million, a comprehensive
measure of the applicant’s financial strength,
program risk assessment was not prepared
and is significant in the determination of the
and the programs were determined to be
amount and type of aid a student can receive.
unsusceptible to the risk of significant
The Department processes the FAFSA data it improper payments.
receives each year, using a sophisticated set of
database matches and computerized editing • For programs with outlays greater than
techniques to confirm student eligibility for the $10 million, but less than $200 million,
Title IV programs and to target error-prone estimates of improper payments were
applications for a verification process. All prepared using the susceptible threshold
applicants are subjected to one or more of the error rate of 2.5 percent. Programs with
student eligibility database matches and improper payment estimates of less than
approximately 30 percent (approximately $5 million were deemed unlikely to be
3.9 million) are selected for verification. susceptible to the risk of significant
improper payments.
Those applicants selected for verification are
required to submit documentation to their school • Programs were selected for further
in order to verify their reported household size, determination of susceptibility to significant

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OTHER ACCOMPANYING INFORMATION
IMPROPER PAYMENTS INFORMATION ACT REPORTING DETAILS
improper payments if annual outlays the government does not pay interest. As a
exceeded $200 million. result of the Higher Education
Reconciliation Act of 2005, graduate or
• Finally, programs were automatically
professional students are now eligible to
deemed susceptible if previously required to
borrow under this loan program, subject to
report improper payment information under
eligibility.
OMB Circular A-11, Budget Submission,
former Section 57.2 • Consolidated Loans—Loans that allow
borrowers to combine multiple outstanding
Risk Susceptible Programs federal student assistance loans.
The following five Title IV programs were During FY 2006, net loans of $46.2 billion were
deemed to be potentially susceptible to the risk provided to 6.2 million FFEL recipients. In
of significant improper payments based on the addition, Federal Student Aid paid an estimated
OMB threshold of potential annual improper $7.5 billion to lenders for interest and special
payment amounts exceeding both 2.5 percent of allowance subsidies, and an estimated
program payments and $10 million. $4.6 billion to Guaranty Agencies to reimburse
them for defaulted FFEL loans, loan processing
Federal Family Education Loan Program. fees, issuance fees, and account maintenance
The Federal Family Education Loan (FFEL) fees required by the HEA. The interest
Program is a guaranteed loan program payments and special allowance subsidies,
established by the HEA. Under the FFEL combined with the default, loan processing,
Program, eligible students apply to lenders such issuance, and account maintenance fees
as banks, credit unions, and savings and loan comprise the program outlays at risk.
associations for loans to vocational,
undergraduate, and graduate schools to help pay Federal Pell Grant Program. The Federal Pell
for educational expenses. If the lender agrees to Grant (Pell Grant) Program provides need-based
make the loan, a state or private nonprofit loan grants to low-income undergraduate and certain
Guaranty Agency insures the loan against postbaccalaureate students to promote access to
default. The federal government subsequently postsecondary education. Students may use
reinsures this loan. FFEL Programs offer their grants at any one of approximately 6,100
various repayment options and provide four eligible postsecondary institutions. Grant
types of loans to qualified applicants. amounts are dependent on the student’s EFC, the
cost of attending the institution, whether the
• Subsidized Stafford Loans—Need-based student attends full-time or part-time, and
loans in which the government pays interest whether the student attends the institution
when the student is in school and during throughout the entire academic year. The
qualified periods of grace and deferment. statutory maximum award remained at $4,050
• Unsubsidized Stafford Loans—Loans in for the 2005-2006 award year.
which the government does NOT pay Under the terms of the HEA, eligibility for Pell
interest. Grant awards is determined exclusively through
• PLUS Loans—Loans to parents of applicant self-reported income, family size,
dependent undergraduate students in which number of dependents in college, and assets.
These data are key drivers in the determination
of program eligibility and eligible amounts.
2
The four original programs identified in OMB Circular A- However, historical analysis indicates that the
11, Section 57 were Student Financial Assistance (now accuracy of self-reported data is prone to error,
Federal Student Aid), Title I, Special Education Grants to
States, and Vocational Rehabilitation Grants to States. and that these errors subsequently increase the
Subsequently, after further review of the program risk, the risk of improper payments within the Pell Grant
OMB removed Special Education Grants to States and program.
Vocational Rehabilitation Grants to States from the list.
The OMB considers Section 57 programs susceptible to While limited matching of some self-reported
significant improper payments regardless of the established income data is currently conducted with data
thresholds.
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IMPROPER PAYMENTS INFORMATION ACT REPORTING DETAILS
from the Department of the Treasury, Internal mechanism to report prior year funds usage and
Revenue Service (IRS) annual income tax current year need. Each year, the aggregated
filings, Federal Student Aid is pursing additional amount of need (for all participating institutions)
authority to allow greater access to IRS data. far exceeds the appropriated amounts for both
Specifically, Federal Student Aid has requested Federal Supplemental Educational Opportunity
authorization to verify 100 percent of the annual Grant and Federal Work-Study programs.
student financial aid applications with the Therefore, by design, the risk of over-awarding
financial data reported to the IRS in annual funds is inherently minimized since award
income tax returns. The ability to verify self- distribution is prioritized by order of need, and
reported financial data could result in a not all students with demonstrated need actually
significant reduction of the risk of improper receive awards. Moreover, continuing oversight
payments in the Pell Grant program. Legislation activities, including audits and program reviews,
to amend the Internal Revenue Code to permit a have not revealed significant risk in either of
100 percent data match has not yet been enacted, these programs.
and at this time appears unlikely to be enacted.
In the interim, Federal Student Aid is working William D. Ford Federal Direct Loan
with the OMB to develop alternative methods. Program. Similar to the FFEL Program, the
William D. Ford Federal Direct Loan (Direct
Federal Supplemental Educational Loan) Program provides the following four
Opportunity Grant and Federal Work-Study types of loans to qualified individuals to assist
Programs. The Federal Supplemental with the cost of postsecondary education:
Educational Opportunity Grant program is one (1) Stafford Subsidized; (2) Stafford
of three campus-based3 formula grant programs Unsubsidized; (3) PLUS; and (4) Consolidation.
allocated to eligible institutions for the purpose
Under the Direct Loan Program, the Department
of providing grants to needy undergraduate
uses Department of Treasury funds to provide
students attending the institution. During
loan capital directly to schools, which then
FY 2005, the Department allocated $1 billion
disburse loan funds to students. During
through the Federal Supplemental Educational
FY 2005, the Department disbursed
Opportunity Grant program to institutions who
$13.9 billion in Direct Loans (net of loan
awarded grants to about 1.3 million low-income
consolidations) through participating institutions
students.
to 1.8 million applicants with financial need who
The Federal Work-Study program is another of met the program criteria.
the three campus-based formula grant programs,
Similar to the Pell Grant Program, improper
providing part-time employment to needy
payments in the Direct Loan Program are
undergraduate and graduate students. In
generally the result of errors in the self-reported
FY 2006, the Department allocated $1.2 billion
eligibility data provided on the FAFSA.
to schools.
However, since the aid is provided as a loan
The Federal Supplemental Educational rather than a gift, and is subject to full
Opportunity Grant and Federal Work-Study repayment (some loans including interest),
programs were surveyed and determined not to eligibility errors alone do not necessarily result
be of significant risk of improper payments. in a significant loss to the government.
Combined, the two programs constituted
Moreover, the authority of the Department to
$2.3 billion, or just 2.6 percent of the
successfully pursue the collection of defaulted
Department’s total payments in FY 2005. Each
loans (properly or improperly made) through tax
year, participating institutions complete the
refund offsets, wage garnishment offsets, and
Fiscal Operations Report and Application to
other legal actions further reduces the
Participate. The Fiscal Operations Report and
government’s risk. The principal risk to the
Application to Participate serves as a
government lies in the cost of administering the
3
loans and the subsidy—the net present value of
Campus-based financial aid programs are administered to cash flows to and from the government that
students by participating postsecondary institutions and not
by the Department of Education. result from providing these loans to borrowers.

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IMPROPER PAYMENTS INFORMATION ACT REPORTING DETAILS
The Department contracts with multiple legally applicable requirement.” Federal
educational and financial institutions to Student Aid has a wide array of programs, each
originate, disburse, service, and collect Direct with unique objectives, eligibility requirements,
Loans, while the HEA and subsequent and payment methods. Consequently, each
reauthorization actions determine the allowable program has its own universe (or multiple
interest rates and fees. Eligibility requirements universes) of payments that must be identified,
are determined through the analysis of factors assessed for risk, and, if appropriate, statistically
such as income and assets, and the schools make sampled to determine the extent of improper
the final award decisions. Because of this payments.
multifaceted structure that encompasses multiple
entity involvement and variable annual Federal Family Education Loan Program.
eligibility requirements, a full and rigorous The Department and Federal Student Aid have
assessment of the rate of improper payments in been working with the OMB on the
the Direct Loan Program is extremely complex. implementation of the President’s Management
Despite this challenge, the Department is Agenda initiative, Eliminating Improper
analyzing the eligibility data used to determine Payments. The initiative involves a range of
the Pell Grant improper payment rate as part of quarterly activities designed to ensure that the
its comprehensive effort to lower the risk of Department is prepared to meet the annual
improper payments in all financial aid programs reporting requirements of the IPIA. Through
that are reliant on applicants’ self-reported meetings and discussions with the OMB and
eligibility information. other Department offices, Federal Student Aid
finalized its sampling methodology for
Academic Competitiveness/SMART Grants. estimating improper FFEL program payments in
In FY 2006, Federal Student Aid program compliance with the requirements of the IPIA
managers discussed the potential risks and and implementation guidance.
controls for avoiding improper payments in the
In FY 2006, Federal Student Aid identified and
recently authorized Academic Competitiveness
performed an internal review of all invoices
/SMART Grant program. Payment processes
included in the statistically valid sample. All of
and risk categories have been identified. In
the Guaranty Agencies and lenders associated
addition, a risk control matrix has been
with each of the invoices in the selected samples
developed for these new programs.
were identified. Twenty-one Guaranty Agencies
and 47 lenders have been identified for on-site
Federal Student Aid Administrative
reviews, which will be conducted in FY 2007.
Payments. As part of our annual assessment of
Program review staff from Federal Student
risk for the susceptibility of significant improper
Aid’s Program Compliance business unit have
payments, we reviewed other types of payments
been identified to perform the on-site reviews.
made by Federal Student Aid. An initial review
of the administrative payments such as payroll For FY 2005, Federal Student Aid established a
disbursements, vendor payments, and travel baseline of estimated improper payments in the
expenses determined that those payments were FFEL Program by evaluating the following
not susceptible to the risk of significant information:
improper payments, as defined by IPIA and the
• Overpayments identified during Financial
related OMB implementation guidance.
Partners Service program reviews of
Guaranty Agencies, lenders and loan
Statistical Sampling
servicers during FY 2005.
The size and complexity of the student aid
• Overpayments identified by independent
programs make it difficult to consistently define
public accountants and third-party audit
“improper” payments. The legislation and the
OMB guidance use the broad definition, “Any
payment that should not have been made or that
was made in an incorrect amount under
statutory, contractual, administrative, or other
162 FY 2006 Performance and Accountability Report—U.S. Department of Education
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firms in Single Audit4 reports for Guaranty 2000-2001 award year. Data provided by the
Agencies and lenders. IRS study were used to estimate improper
payments for the Pell Grant Program for the
• Overpayments reported by the Department’s
2004-2005 award year. Federal Student Aid is
Inspector General in audits and reviews of
currently working with the IRS on the fifth
Guaranty Agencies, lenders, and loan
annual study, using FAFSA data collected for the
servicers during FY 2005.
2005-2006 award year, which will be matched
• Outstanding loan balance amounts at with IRS data for the 2004 income tax year.
Guaranty Agencies, lenders, and servicers (Applicants for the 2005-2006 award year
selected for review. reported income information based on their
actual or estimated 2004 income tax year.)
The preliminary estimated rate for the FFEL
Program is 2.2 percent. This estimate was In the latest completed study, which compared
derived based on an evaluation of the criteria 2004-2005 FAFSA data with 2003 IRS data, a
aforementioned. sample file of 155,000 FAFSA applicant records
was provided to the IRS along with a sampling
The information was compiled by entity and
program designed to allow the IRS to select the
compared to the total payments made to those
desired analysis sample from the larger file.
entities in fiscal year 2005 to determine if there
This was done to preserve IRS confidentiality
exists a susceptibility to significant improper
requirements. The final sample, generated by
payments. The focus of this analysis was to
the IRS, contained 50,000 independent
(1) determine a baseline error rate for FFEL
undergraduates and 50,000 dependent
payments, (2) establish an action plan for
undergraduates (for whom parental data was
improving the accuracy of future measurements,
matched).
and (3) ensure that the planned methodology and
approach for measuring improper payments The IRS matched the final sample to its main
meets the requirements of the IPIA. database, and when a match occurred, it
extracted the fields for AGI, taxes paid, type of
During the fiscal year, the Inspector General
return filed and earned income tax credit
issued an audit report that questioned payments
information for the tax filer and compared this
made to an entity that participates in the Federal
information to similar information reported to
Family Education Loan Program. The findings
the Department on the FAFSA. Using a
cited in this report are under consideration by
computer program supplied by Federal Student
the Department. Until the matter is resolved, the
Aid, the IRS calculated revised EFC and Pell
potential impact, if any, on the Department’s
Grant awards for matching records by
financial position is not possible to estimate.
substituting the IRS income information for the
Federal Pell Grant Program. Section 484(q) FAFSA income information. The IRS provided
of the HEA authorizes the Department to aggregated statistical tables to the Department
confirm directly with the IRS the AGI, taxes that presented the results of these comparisons.
paid, filing status, and number of exemptions The results allowed the Department to estimate
reported by students and parents on the FAFSA. the following Pell Grant improper payment
Under the IRS Code, Federal Student Aid is not information:
authorized to view the complete data, but is
• Improper payment rate and amount—The
provided with summary data by the IRS.
average amount of over- and under-
The Department began routinely conducting reporting of FAFSA income data—as
studies with the IRS using FAFSA data for the compared to the IRS income data—and the
potential dollar amount of improper Pell
4
“Single audit” means an audit, which includes both the Grant awards;
entity's financial statements and the federal awards
pursuant to the Single Audit Act of 1984, P.L. 98-502, and
• Assessment of measurement accuracy—The
the Single Audit Act Amendments of 1996, P.L. 104-156. volume of applicants for whom a mismatch
The provisions of the statute are set forth in OMB Circular between FAFSA and IRS data may be
No. A-133, Audits of States, Local Governments, and Non- legitimate;
Profit Organizations.

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• Identification of further potential risks— 2003-2004 to 2004-2005 and is minimal at this
Types of applicants who are more likely to time. However, we recognize the importance of
misreport income on the FAFSA; being vigilant in analyzing data reported to the
• Analysis of existing edits—Validity of the Department. The strengthening of verification
current verification selection edits, and to improve the accuracy of applicant reported
information to further refine them. data will have an effect on reducing improper
The table below presents a historical analysis of payments in all Title IV programs, including the
the results of the IRS Statistical Study of Pell Federal Direct Loan Program.
Grants.
Corrective Actions
Pell Grant Improper Payment Estimates
Federal Family Education Loan Program.
($ in millions)
Federal Student Aid is working closely with the
OMB and other Department offices in the
Total Improper Payments*

Percent Underpayments*

Percent Overpayments*

Improper Payments* development of an action plan designed to

(1) improve the accuracy of the FFEL improper
payment estimate, and (2) reduce the level of
Underpayments
Disbursements

Overpayments

Percent Total

risk and the amount of known improper

Fiscal Year

payments in the FFEL Program. Understanding

and developing systems of internal controls over
program payments is crucial to these goals.
2001 $ 9,851 $ 64 $272 $336 .8% 3.4% 4.2%

2002 $11,619 $ 49 $328 $378 .5% 3.3% 3.8% Federal Student Aid has a number of existing
internal controls integrated into its systems and
2003 $12,680 $205 $365 $569 1.8% 3.1% 4.9% activities. Program reviews, independent audits
2004 $13,042 $221 $349 $571 1.8% 2.8% 4.5% and Inspector General audits of Guaranty
Agencies, lenders, and servicers are some of its
2005 $12,749 $140 $303 $444 1.1% 2.38% 3.48%
key management oversight controls. Other
*Amounts are rounded control mechanisms in place are described
below.
• System Edits—the systems used by the
Guaranty Agencies, lenders, and servicers to
William D. Ford Federal Direct Loan
submit fee bills for payment include “hard”
Program. The analysis and corrective actions and “soft” edits to prevent erroneous
developed for the Pell Grant Program, relative to information from being entered into the
application accuracy, will also improve the system and translated into erroneous
accuracy of Direct Loan program applications, payments. The hard edits prevent fee bills
because (1) the same application is used for both with certain errors from being approved, and
programs, and (2) eligibility for subsidized these errors must be corrected before
direct loans are founded on the same need-based proceeding with payment processing. The
analysis formula and institutional cost of soft edits alert the user and Federal Student
Aid to potential errors. Federal Student Aid
attendance. Federal Student Aid, in
reviews these warnings prior to approval of
coordination with the OMB, performed an payment.
assessment of the risk of improper payments
based upon the comparison of school cash draws • Reasonability Analysis—data stored in the
with loan disbursements for FY 2005. This National Student Loan Data System are used
as a tool to assess the reasonability of fee
assessment showed that the risk of improper
billing, and to determine payment amounts
payments in this function has decreased from
164 FY 2006 Performance and Accountability Report—U.S. Department of Education
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for account maintenance and loan issuance payments.
processing fees paid to Guaranty Agencies.
Federal Student Aid also performs trending Preliminary Analysis. Eligibility for Title IV
analysis of previous payments to Guaranty student aid is determined through applicant self-
Agencies, lenders and servicers, as a means reported income, family size, number of
of evaluating reasonableness of changes in dependents in college, and assets. These data
payment activity and payment levels. are reported through the FAFSA, which
applicants typically complete prior to the April
• Focused Monitoring and Analysis—Federal 15 IRS tax filing deadline. The FAFSA data are
Student Aid targets specific areas of FFEL key drivers in the determination of student aid
payment processing that are at an increased program eligibility and eligible amounts.
risk for improper payments as areas of focus Federal Student Aid performs regular analysis
for increased monitoring and oversight. on the accuracy of income and other financial
These existing controls are re-evaluated on a data submitted via the FAFSA. These routine
regular basis to determine their effectiveness and analyses include a variety of methods and
to allow Federal Student Aid to make necessary techniques designed to ensure payment
corrections. Further, Federal Student Aid’s accuracy.
action plan incorporates the development of • Annual Analysis of System Data - Analysis
additional internal controls designed to improve of central processing system data for
the accuracy of future FFEL payments to anomalies.
lenders, servicers, and Guaranty Agencies.
• Focus Groups - Meetings with educational
• Special Allowance Payments – increased institutions to discuss improving the
focus and review of payments of fees to integrity of FSA programs.
lenders and servicers associated with loans
eligible for tax-exempt special allowance • Quality Assurance - Enhanced program
payments. integrity processes.

• Guaranty Agencies – enhanced review of the • Verification - A process by which

Guaranty Agency Financial Report (Form institutions compare applicant data to IRS
2000) to report collection activities, claims data for the same period.
reimbursement, and loan portfolio status; Federal Student Aid is also using the IRS
and under- and over-billings for account statistical study in which financial data from a
maintenance, loan issuance, and processing random sample of FAFSA submissions is
fees associated with incorrect National compared to financial data reported to the IRS in
Student Loan Data System reporting. annual income tax filings to identify new
Additional controls are being considered for solutions for preventing improper payments.
both cost efficiency and effectiveness in The analysis of the IRS statistical study indicates
reducing FFEL payment errors. Updates to the that failure to accurately report income, family
corrective action plan will be reported to the size, number of dependents in college, and assets
OMB in the quarterly scorecard for Eliminating may be the primary cause of improper payments
Improper Payments. within the Pell Grant Program. It is expected
that a decrease in financial reporting errors
Federal Pell Grant Program. Federal Student would have the greatest impact on the reduction
Aid has several initiatives underway designed to of estimated improper payments. In an effort to
improve its ability to detect and reduce improper achieve this reduction, Federal Student Aid has
payments made in the Pell Grant Program. requested authorization to perform a 100 percent
Working with the OMB on quarterly action plan match of the financial data reported on the
FAFSA to the financial data reported to the IRS
objectives designed to facilitate full
on applicant income tax returns. However,
implementation of the IPIA, it has identified current law does not permit Federal Student Aid
additional methods to determine the error rate to verify income data with the IRS. Although
and to estimate the annual amount of improper
FY 2006 Performance and Accountability Report—U.S. Department of Education 165
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Federal Student Aid plans to pursue this option,
it must continue to meet the reporting William D. Ford Federal Direct Loan
requirements of the IPIA. Federal Student Aid Program. While the risk of significant
is pursuing alternatives that will accomplish the improper payments in the Direct Loan Program
same result: reduced improper payments in the has been considered minimal, Federal Student
Pell Grant Program. Aid developed a separate action plan to achieve
Alternatives to Verifying Self Reported AGI. IPIA reporting elements for this program during
Federal Student Aid, working with officials from FY 2006. Assessment of the risk of improper
the OMB and the Department, has been payments in the Direct Loan Program was based
exploring alternatives to the 100 percent IRS upon an evaluation of the annual audits required
match for verifying self-reported financial of the schools participating in the programs.
information reported on the FAFSA, and Information on all audits was queried from
assessing the strengths and weaknesses of those Postsecondary Education Participants Systems,
alternatives. Listed below are some of the our management information system of all
alternatives that are being considered:
schools participating in the student aid
• Private database matches (data aggregators). programs. Audit deficiencies resulting in
• Require actual tax returns for FAFSA filing. liabilities due to a specific Direct Loan Program
violation or due to a violation of regulations
• Require update to income data at tax filing applicable to all programs were isolated. The
deadline. liability amount for each deficiency applicable
• Expand verification beyond 30 percent. to the Direct Loan Program was calculated and
The ongoing action plan details the steps compared with total funding.
necessary to (1) perform statistical analysis, The contractor’s correction plan verified that
(2) complete the review of the alternative, incorrect payments were identified by
(3) incorporate current IRS statistical analysis, completing two separate reviews of all National
and (4) submit the recommended alternative or Student Loan Data System sourced
combination of alternatives. Progress in certifications. This review verified that
completing actions will continue to be reported incorrectly disbursed funds were recovered, or
to the OMB in the quarterly scorecard for are in the process of being recovered. In
Eliminating Improper Payments. addition, the contractor reviewed the loan
Federal Student Aid’s ability to project improper servicing accounts of both the underlying loans
payment reductions is wholly dependent upon that were Direct Loans and the resulting
the completion of the corrective action plan and consolidation loans to ensure that correcting
the selection of an alternative approach to a transactions being passed from loan
100 percent IRS income match for every consolidation resulted in complete correction of
application. This will not be a quick or easy the borrowers’ accounts, and no adverse impact
process. It is important to note that the system was imposed on the borrower. This review
development life cycle for the pertinent Federal included ensuring that borrowers’ progress
Student Aid systems requires significant lead toward and eligibility for on-time payment
time for requirements, testing, coding and incentives was not affected, and that payments
implementation of changes required to deploy were correctly reapplied following receipt of the
the changes necessary to reduce improper correcting transaction.
payments.

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Federal Student Aid Summary

The following table presents the improper payments outlook for the primary Federal Student Aid
Programs.

Federal Student Aid Improper Payment Reduction Outlook Fiscal Years 2005 – 2009
($ in millions)

Actual Estimated
2005 2006 2007 2008 2009
Program Outlays1 IP % IP $ Outlays IP % IP $ Outlays IP % IP $ Outlays IP % IP $ Outlays IP % IP $
Direct Loan
Program $12,231 NA2 NA NA NA NA NA NA NA NA NA NA NA NA NA
FFEL
Program4 $8,626 2.2% $190 $18,245 2.2% $401 $5,340 2.2% $117 $5,340 2.2% $117 $5,340 2.2% $117
Pell Grant
Program $12,749 3.48%3 $444 $12,117 3.48% $422 $12,825 3.48% $446 $12,825 3.48% $446 $12,825 3.48% $446

1
Outlays reported in the table have been adjusted to reflect actual disbursements of funds, net of internal and intra-governmental
adjustments or transfers.
2
Federal Student Aid is working with the OMB and other Department offices to determine whether a statistically valid estimate of
improper payments is necessary for the Direct Loan Program.
3
Combined over- and under-payment error rate is 3.48 percent. A separate analysis of the overpayments and underpayments was
previously presented in the Pell Grant table.
4
Federal Student Aid is working to update future year improper payment estimates as the methodology is further developed.

Manager Accountability Beginning in 2005, a control group of FAFSA

applicants who had estimated their 2004 income
Federal Student Aid program managers are when completing the application were advised
responsible for making recommended after April 15 to revise the application with the
improvements and achieving quantifiable correct and known information filed on their
savings. The Federal Student Aid Executive 2004 income tax return.
Management Team monitors these efforts. The
Executive Management Team is composed of
Statutory or Regulatory Barriers
key managers and is the executive decision-
making body within Federal Student Aid. As stated previously, a database match with the
Further, the Office of Inspector General IRS would likely improve the accuracy of Pell
conducts periodic audits of student aid programs Grant awards. In addition, it would eliminate
and makes appropriate recommendations to the need for schools to rely on paper copies of
management and the Congress. tax returns submitted by the applicant (and the
applicant’s parent, if the applicant is dependent)
Reducing improper payments in the Pell Grant
to verify AGI and taxes paid amounts.
Program has been a performance measure in the
However, legislation to amend the Internal
Department’s Strategic Plan since 2002. The
Revenue Code to permit the database match has
IRS statistical study has also been included in
not yet been enacted and at this time appears
Federal Student Aid’s Annual Plans. In
unlikely to be enacted.
addition, projects have been included in the
Federal Student Aid Annual Plan to improve the
verification process results.

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Title I
The Department performed a risk assessment of
the Elementary and Secondary Education Act Manager Accountability
Title I Program, parts A, B, and D, during
FY 2006. The Erroneous Payments Risk In fiscal year 2006, the Department used a
Assessment Project Report documented that the database of the OMB Circular A-133 single
risk of improper payments under the current audit findings to provide feedback to program
statutory requirements is very low. In order to managers regarding the frequency and
validate the assessment data, the Department distribution of findings within their programs.
conducted an on-site monitoring review in This will assist the managers in tailoring their
FY 2006 that encompassed all states and program monitoring efforts to the type of
territories receiving Title I funds with a three- findings that most frequently occur.
year review cycle. The Office of the Chief
Additionally, a new grants monitoring training
Financial Officer participated with the Office of
Elementary and Secondary Education in the course is now offered and a post-audit follow-up
monitoring process, beginning March 2005, to overview course is currently being developed to
provide technical support regarding fiduciary improve the usefulness of OMB Circular A-133
compliance. There were no findings in the single audits to the Department.
monitoring reviews with questioned costs that
contradicted the data in the risk assessment. The Department also plans to develop manager’s
The Department is continuing to review and internal control training that will focus on
monitor for data quality. A key element of the controls to eliminate improper payments. The
monitoring process involves the wide use of the mandatory one-day seminar for all Department
number of children who qualify for free and managers will provide a framework for
reduced price meals to determine an individual administering the improper payment controls
school’s Title I eligibility and allocation by local program utilizing applicable regulations,
educational agencies. The Title I statute guidelines, and best practices. Part of this one-
authorizes local educational agencies to use day training will focus on the utilization of the
these data, provided under U.S. Department of
risk assessment criteria to properly assess the
Agriculture’s National School Lunch Program,
for this purpose. In many districts these data are risk of improper payments in the Department’s
the only indicator of poverty available at the programs.
individual school level.
Planned Corrective Actions
Currently, the U.S. Department of Agriculture is
working with states and localities to improve In addition to the actions previously outlined
program integrity, within the existing statutory under the Federal Student Aid Programs and
and regulatory framework, through enhanced Title I sections, the Department will configure
monitoring and auditing to improve program our corrective action plans based on the results
integrity. The U.S. Department of Agriculture is of the initiatives outlined above. The
also working with the Department and other Department will record and maintain corrective
federal agencies that have programs that make action plans as required. These records will
use of these data to explore long term policy include due dates, process owners, and task
options. completion dates.

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the Oak Ridge National Laboratory data mining
Information Systems and Infrastructure effort. It is also anticipated that the Department
The Department has requested $450,000 for will incur costs related to mitigation activities.
FY 2007 and $450,000 for FY 2008 in our
budget submission for information system
infrastructure improvements. A portion of the
funds will be used to continue the refinement of

Remaining Grant Programs

During FY 2006, the Department expanded and that calculating estimated improper error rates at
strengthened its approach to evaluating the risk that high of a level can effectively mask the
of improper payments associated with its potentially higher rates that might exist if a
remaining grant programs. The Department “program” is defined to mean the CFDA level.
continued to work with the Department of To further refine the Department’s methodology,
Energy’s Oak Ridge National Laboratory to Oak Ridge National Laboratory was tasked to
perform data-mining on information available in perform the FY 2006 risk assessment at the
the Federal Audit Clearinghouse’s Single Audit CFDA level in addition to the functional
Database, the Department’s Grant program level. The details of this analysis are
Administration and Payment System, and the available from the Office of the Chief Financial
Department’s Audit Accountability and Officer upon request.
Resolution Tracking System.
Another change implemented for the FY 2006
The Department’s approach to the risk review was to count all costs identified as
assessment process for non-Federal Student Aid questioned costs in single audits as improper
grant programs was to develop a methodology to payments. The FY 2005 assessment reduced the
produce statistically valid measures that could questioned costs by one half to account for the
be applied uniformly across the Department’s questioned costs that are not sustained during the
programs. The intent is to use the same audit resolution process. Although it was
methodology across all non-Federal Student Aid reasonable to adjust the questioned costs
grant programs to establish a level of quality downward to account for the low percentage of
control for all programs and at the same time sustained questioned costs, the Department
produce a cost effective measure. The determined a more conservative approach better
Department deemed it cost effective to utilize serves the intent of the IPIA. In addition, the
the results of the thousands of single audits risk assessment is designed to establish the
already being performed by independent upper bound of improper payments for the
auditors on grant recipients. programs.

FY 2006 Improvement to Risk Risk Assessment

Assessment To conduct the risk screening, Oak Ridge
One of the concerns that resulted from the National Laboratory augmented the Audit
FY 2005 Oak Ridge National Laboratory study Accountability and Resolution Tracking System
is the definition of what constitutes a “program.” database with imputed values for the “likely
The Department’s original definition was at a questioned costs” for grants that were not
high level in order to effectively match audited. The imputed and real questioned costs
anticipated outlays as defined in our budget could then be tabulated to provide a reasonable
submissions and consequently grouped many upper bound estimate of the rate of erroneous
Catalogue of Federal Domestic Assistance payments for each of the functional programs of
(CFDA) numbers into a single “functional interest. If the computed upper bound
program.” The concern with this definition was percentage is below 2.5 percent, then the actual

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value will be lower than 2.5 percent. If the System input to the module's database is limited
computed upper bound percentage is greater to specific grants policy staff who are fully
than 2.5 percent, then the actual value may be trained in policy and system use. In addition to
greater or less than 2.5 percent but the the module's certification requirement, various
Department will need additional information to reports are provided such that continual
determine the appropriate estimate. monitoring of grantee risk is made available to
The key results of the analysis are presented in
the chart. It contains the estimates of the Grant Program
Improper Payment Estimates
average functional program rates of questioned
costs for recent years. The most striking point %
about the table is the generally low rate of Functional Program
2001 2002 2003 2004
questioned costs. With only one exception, the Education Research,
rates are below 2.5 percent. The key finding of 0.00 0.02 0.36 0.0
Statistics & Assessment
this analysis is that for the most recent year for Elementary & Secondary
which data are available (FY 2004), none of the 0.13 0.12 0.13 0.6
Education
functional programs exceeds the threshold value
English Language Acquisition 0.00 0.02 0.10 0.1
of 2.5 percent. The assessment at the CFDA
level revealed similar results. Consequently, Higher Education 2.72 0.29 0.21 0.4
none of the programs should be labeled as a
high-risk program. Impact Aid 0.00 0.55 0.04 0.4

Managing Risk in Discretionary Grants Innovation and Improvement 0.28 0.21 0.23 0.1

In FY 2006, the Department managed more than Rehabilitation Services &

0.07 0.12 0.32 2.1
10,000 discretionary grant awards. Due to the Disability Research
vast legislative differentiation and the Safe & Drug-Free Schools 0.37 0.33 0.13 1.2
complexity of the Department's grant award
programs, ensuring that our program staff are Special Education 0.09 0.06 0.83 0.1
fully aware of potentially detrimental issues
relating to individual grantees is a significant Title I 0.04 0.16 1.19 0.2
challenge. Program offices must occasionally
Vocational & Adult Education 0.20 0.25 0.12 0.2
designate specific grants as high-risk, following
collaboration with the respective program legal Total 0.06 0.04 0.16 0.4
counsel and the Department's Grants Policy and
Oversight Staff.
Department program administrators.
In an effort to ensure efficiency and reduce risk,
the Department has established the Grants High- Implementation of the module provides greater
Risk Module. This module is housed within the accountability and significantly reduces risk
Department's Grant Administration and Payment within the Department's grant award process by
System, such that program office staff are ensuring program office awareness of potentially
required to review and certify their awareness of detrimental grantee issues prior to award
the high-risk status of applicable grantees before determination. We anticipate that increased
making awards. accessibility of information and communication
across our program offices will promote further
Policies and procedures were developed to monitoring of high-risk grantees, such that the
support implementation of the high-risk module. number of grantees so designated will decline.

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Recovery Auditing Progress

To effectively address the risk of improper are minimal. Fiscal year 2006 payments will be
administrative payments, the Department reviewed during FY 2007. Our purchase and
continued a recovery auditing initiative to travel card programs remain subject to monthly
review contract payments. All vendor payment reviews and reconciliations to identify potential
transactions made from FY 1998 through misuse or abuse.
FY 2005 were reviewed. Potential recoveries

Summary
The Department of Education is continuing its The Department is focused on identifying and
efforts to comply with the Improper Payments managing the risk of improper payment
Information Act. While there are still challenges problems and mitigating the risk with adequate
to overcome, the Department has demonstrated control activities. In FY 2007, we will continue
in FY 2006 that it is committed to ensuring the to work with the OMB and the Inspector
integrity of its programs. The Office of General to explore additional methods for
Management and Budget recognized our identifying and reducing potential improper
progress in managing improper payments when payment activity in our programs, and to ensure
the Department’s implementation progress compliance with the IPIA.
scorecard was raised to green on the President’s
Management Agenda initiative for Eliminating
Improper Payments.

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REPORT TO CONGRESS ON AUDIT FOLLOW-UP
Report to Congress on Audit Follow-up

The Inspector General Act, as amended, requires information in the table below represents audit
that the Secretary report to the Congress on the reports for which receivables were established.
final action taken for the Inspector General
audits. With this Performance and Final Actions on Audits with Disallowed Costs
Accountability Report, the Department of Fiscal Year Ended September 30, 2006
Education is reporting on audit follow-up Number of Disallowed
Reports Costs
activities for the period October 1, 2005, through
September 30, 2006. Beginning Balance as of 10/1/2005 59 $ 34,285,141
+ Management Decision 192 28,670,284
The Audit Accountability and Resolution
Tracking System is the Department’s single Pending Final Action 251 $ 62,955,425
database system used for tracking, monitoring, - Final Action 179 20,078,463
and reporting on the audit follow-up status of the Ending Balance as of 9/30/2006 72 $ 42,876,962
Government Accountability Office audits; the
Office of Inspector General issued internal
audits, external audits, and alternative products; Number of Audit Reports and Dollar
and Single Audits of funds held by non-federal Value of Recommendations That Funds
entities. The Department’s audit follow-up Be Put to Better Use
system functionalities allow the following:
The Department has a total of 9 audit reports of
• Tracking of internal, external, sensitive, and
which one is under review. The remaining
alternative product types from inception to
8 audit reports totaling $254 million with
final disposition.
recommendations that funds be put to better use.
• Evaluation and escalation points for audit Only 4 of these, totaling $12.5 million, have
reports and recommendations at appropriate been resolved. Resolution occurs when there is
levels in the user hierarchy. agreement between the program office and the
Department’s Office of Inspector General on the
• Notifying users of audit decisions and
corrective actions that will be taken to address
approaching or expiring events and
all of the recommendations in the audit.
transactions.
• Downloading report and query results into Reports Pending Final Action One Year
electronic file formats. or More After Issuance of a Management
• Attaching files to the audit record. Decision

• Providing a personal portal (Digital As of September 30, 2006, the Department has a
Dashboard) for user-assigned transactions. total of eight Office of Inspector General
internal and nationwide audit reports on which
• Providing a search function to query
final action was not taken within a year after the
application (Audit Report) data.
issuance of a management decision; 62 percent
• Providing for both a defined and an ad hoc were less than two years old. Many corrective
report generation environment. actions are dependent upon major system
changes that are currently being implemented.
Number of Audit Reports and Dollar For detailed information on these audits, refer to
Value of Disallowed Cost the Department’s Semiannual Report to
Congress on Audit Follow-up Number 35.
At the start of this reporting period, the balance
for audit reports with disallowed costs totaled
59, representing $34.3 million. At the end of the
reporting period, the outstanding balance was
72 audits, representing $42.9 million. The

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CREDIT MANAGEMENT AND DEBT COLLECTION IMPROVEMENT ACT
Credit Management and Debt Collection Improvement Act

The Department of Education has designed and The Department also continues to conduct
implemented a comprehensive credit computer matches with other federal agencies as
management and debt collection program that part of our effort to strengthen the management
enables us to effectively administer our multi- and oversight of student financial assistance
billion-dollar student loan and other programs. programs. The computer matches are designed
The credit management and debt collection to ensure that students meet various eligibility
program covers each phase of the credit cycle— criteria and to increase the collections from
including prescreening of loan applicants, students who have defaulted on their loans.
account servicing, collection, and close-out—
The Department categorizes debt into two basic
and it conforms to the government-wide policies
categories: student loan debt, which accounts
in the Federal Claims Collection Standards, the
for approximately 99 percent of all of the
Office of Management and Budget Circular No.
Department’s outstanding debts, and
A-129, “Managing Federal Credit Programs,”
institutional and other administrative debt. The
and the Debt Collection Improvement Act. As a
Department of Treasury granted the Department
result, the Department has made significant
a permanent exemption from the cross-servicing
strides in student loan default management and
requirements of the Debt Collection
prevention.
Improvement Act for defaulted student loans and
The Department has been working diligently approval to continue to service our own internal
with schools and partners in the student loan student loan debts because of our successful
industry to reduce the cohort default rate. The track record. However, we have been referring
fiscal year 2004 cohort default rate is eligible student loan debts—those we previously
5.1 percent. The low default rate is a function of tried to collect using all other available tools—to
the Department’s improved borrower counseling the Department of Treasury for tax refund offset
and the steps we have taken in gate keeping to since 1986.
remove schools with high rates from
The Department handles our institutional and
participating in the federal student loan
administrative debts outside of the systems
programs.
established for student loans. The Department
Borrowers who default on student loans face was one of the first to participate in the Treasury
serious repercussions, such as the withholding of Cross Servicing Program and has been referring
federal income tax refunds and other federal delinquent debts since October 1996. As of
payments, wage garnishment, adverse credit September 30, 2006, we have forwarded
bureau reports, denial of further student aid, and approximately 95 percent of all institutional and
prosecution. To avoid these sanctions, administrative debts eligible for cross servicing
defaulters have the option to consolidate their to Treasury.
loans and establish an income-based repayment
plan that more realistically matches their ability
to pay.

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MANAGEMENT CHALLENGES
MANAGEMENT CHALLENGES FOR FISCAL YEAR 2007
The Office of Inspector General (OIG) works to promote efficiency, effectiveness, and integrity in the
programs and operations of the U.S. Department of Education (Department). Through our audits,
inspections, investigations, and other reviews, we have identified areas of concern within the
Department’s programs and operations and have recommended actions the Department should take to
address these weaknesses. The Department generally implements our recommendations and takes action
to recover funds from grantees, contractors, and other recipients we identify as wrongly paid. While our
work is a valuable tool for the Department, it is not a substitute for good management and organizational
accountability.

The Reports Consolidation Act of 2000 requires OIG annually to identify and summarize the top
management and performance challenges facing the Department, as well as to provide information on the
Department’s progress in addressing those challenges. Based on our recent work and knowledge of the
Department’s programs and operations, we have identified three specific challenge areas for the
Department for FY 2007: (1) accountability; (2) information technology; and (3) human resources (HR).
While this report discusses the progress the Department is making in addressing these challenges, it is
evident that additional focus, attention, and emphasis are needed.

1. ACCOUNTABILITY

Challenge: Internal Control and Oversight

The success of an organization’s mission and the achievement of its goals depend on how well it manages
its programs. It cannot effectively manage its programs without establishing and maintaining appropriate
internal accountability. In 1999, the Government Accountability Office released “Standards for Internal
Control for the Federal Government,” a document that provides federal agencies with an overall
framework for establishing and maintaining internal controls, i.e., the plans, methods, and procedures that
will help the organization meet its goals and achieve its objectives.

Our recent audits, inspections, and investigations continue to uncover problems with program control and
oversight of program participants, placing billions of taxpayer dollars at risk of waste, fraud, abuse and
non-compliance. The Department must ensure that all entities involved in its programs are adhering to
statutory and regulatory requirements, and that the offices responsible for administering these programs
are providing adequate oversight of program participants. Only by improving effective oversight of its
operations and demanding accountability by its managers, staff, contractors, and grantees can the
Department be an effective steward of the billions of taxpayer dollars supporting its programs and
operations.

The Department’s Progress: The Department has made some progress toward improving oversight and
monitoring of non-student financial assistance programs. For the Elementary and Secondary Education
Act (ESEA) Title I program, the Department’s monitoring plan now includes participation by staff from
the Office of the Chief Financial Officer to provide technical support in the fiduciary area of the reviews.
In a review of audited questioned costs and analysis of improper payments, the Department is no longer
reducing questioned costs by 50 percent to establish an estimated amount of sustained costs, but is
correctly using the full amount to better establish an upper bound of improper payments. The Department
also has implemented a Grants High-Risk Module within the Grant Administration and Payment System
to better alert program offices of potentially detrimental grantee issues prior to award determination.

To address internal control issues identified by our work, Federal Student Aid (FSA), the office that
administers the student financial assistance programs, made changes to the organizational structure of one
of its internal offices, Financial Partners, and transferred the regional offices out of Financial Partners to a

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new Program Compliance organization. The functional statements for the new organizations, however,
indicate overlapping jurisdiction and do not clearly delineate responsibility for resolving compliance
violations.

Challenge: Improper Payments

Improper payments include those made in the wrong amount, payments made to an ineligible recipient, or
payments improperly used by the recipient. The need for agencies to take action to eliminate
overpayments is recognized by the President’s Management Agenda, as well as the Improper Payments
Information Act of 2002. Identifying and correcting improper payments remains a challenge for the
Department, which is a result of ineffective oversight and monitoring of its policies, programs and
program participants.

The Department’s Progress: To address the requirements of the Improper Payments Information Act,
the Department continued to participate in presentations or perform monthly monitoring site visits for its
ESEA Title I program at various state and local educational agencies. It also continued to enlist the help
of the Oak Ridge National Laboratory to perform its risk analysis of its non-student financial assistance
programs. The 2006 Oak Ridge National Laboratory Report indicated that the Title I program was not at
risk of exceeding the 2.5 percent Improper Payments Information Act threshold that would require further
statistical review. The Department is also performing on-site monitoring reviews for its ESEA Title III
program.

With regard to the student financial assistance programs, FSA has undertaken several initiatives to help
address and reduce improper payments. Some of these efforts have included a continued focus on
controls over financial aid applications; performing risk assessments; working with the Office of
Management and Budget (OMB) and the Department on a quarterly basis to address various Improper
Payment Information Act implementation issues, such as the sampling methodology for estimating
improper payments; conducting studies with the Internal Revenue Service; focused monitoring activities;
and performing various analyses of certain data in the FSA programs. For the most recent year, 2004-05,
FSA reported an improper payment rate for the Pell Grant program of 3.48 percent, down from 4.5
percent for the prior year. FSA also is taking steps to identify risks and establish controls to avoid
improper payments in a new program – the Academic Competitiveness/SMART Grant program.

Challenge: Procurement

The Department contracts for many services that are critical to its operations, at a value of close to $1
billion a year. The Department must improve its procurement and contract management processes to
ensure that it is receiving quality goods and services in accordance with the contract terms. Our audit
work continues to find weaknesses in the Department's processes for monitoring contractor performance,
such as not effectively tracking and inspecting deliverables, paying for deliverables that were not
provided, not adequately reviewing invoices, improperly providing incentive payments, giving
unauthorized instructions to the contractor, not informing the contracting officer of changes in key
personnel, and not documenting evaluations of contractor reports.

The Department’s Progress. In response to OIG's continuing audits of the contracting monitoring
processes, the Department issued a new procedure requiring that contract monitoring plans be developed
for all new contracts. This procedure was issued in December 2005, and also required that contract
monitoring plans be developed for all existing contracts by January 31, 2006. In March 2006, the
Department updated its policy, Contract Monitoring for Program Officials, to correct issues noted in
prior OIG reviews.

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2. INFORMATION TECHNOLOGY

Challenge: Information Security

The Federal Information Security Management Act (FISMA) requires each federal agency to develop,
document, and implement an agency-wide program to provide information security for the information
and information systems that support the operations and assets of the agency, including those provided or
managed by another agency, contractor, or other source. It also requires the Inspectors General to
perform an annual, independent evaluation of its agency’s information security program and practices.

We have conducted FISMA compliance audits for the last four years. In each case, we identified security
weaknesses that the Department must address to maintain the security certification and accreditation of its
systems. We determined that certain management, operational, and technical security controls need
improvement to adequately protect the confidentiality, integrity, and availability of its systems. We have
identified weaknesses in the Department’s incident handling process and procedures, intrusion detection
system deployments, and enterprise-wide technical configuration standards for all systems. In addition,
we found that its outsourced data centers do not have adequate security controls and safeguards in place
to protect personally identifiable information (PII) and other sensitive information that is stored on its
system tape backups. During a related audit, we also found that the office in the Department that had the
highest number of contractors in FY 2005 had not ensured that all contractor staff met screening
requirements before giving them access to the Department data and facilities. These deficiencies must be
addressed in order to maintain the security certification and accreditation of its systems, as well as to
protect PII and other sensitive information.

The Department’s Progress: The Department continues to struggle to establish a mature computer
security program in the areas of developing technical configuration standards for all its systems,
managing its outsourced contractors who operate its critical information systems, and ensuring the
identification and response to its incident handling program and intrusion detection systems.

The Department recently established plans to improve its controls relating to the protection of PII in order
to meet the standards and good practice requirements established by OMB. Budget and contracting
constraints have negatively impacted the Department in moving forward with improving these controls.

Challenge: Information Technology Capital Investment and Project Management

The Department’s anticipated FY 2007 Information Technology (IT) capital investment portfolio is over
$90 million, and many critical IT projects are pending, including investments in the Office of the Chief
Financial Officer, the Office of the Chief Information Officer, and FSA. It is critical that the Department
have a sound IT investment management control process that can ensure that technology investments are
appropriately evaluated, selected, justified, and supported. This oversight and monitoring process must
address IT investments as an agency-wide portfolio. It must also ensure that individual projects are
appropriately managed so as to meet their technical and functional goals on time and on budget. As part
of this process, the Department must identify a means of conducting independent evaluations of
significant IT projects. Independent Verification and Validation (IV&V) could be a viable approach, if
the IV&V results are shared with the Investment Review Board for its consideration. Poor management
of individual IT investments leads to wasted resources and/or unreliable or inadequate systems.

The Department’s Progress: While the critical issue of independent assessment remains unaddressed,
the Department has recently strengthened the IT capital investment program by expanding the Investment
Review Board and Planning and Investment Review Group memberships. The Department has also made

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continued efforts to strengthen individual business cases, and to map proposed investments to an agency-
wide enterprise architecture strategy. These efforts are important and should continue.

3. HUMAN RESOURCES

Challenge: Human Capital Management and Human Resources Services

Our last several Management Challenges reports have included human capital planning as one of the
significant challenges facing the Department. Like most federal agencies, the Department will see a
significant percentage of its workforce eligible for retirement in 2007. The Department is also continuing
to see a significant change in critical skill requirements for many of its staff. Identification of needed
action steps and prompt implementation of action items to adequately address these workforce and
succession planning issues, including recruitment, hiring and retention, is critically important.

The Department has already committed considerable time and resources to prior HR initiatives -- One-ED
and the HR most efficient organization -- that were minimally beneficial, if at all. In order to address the
HR issues facing it, the Department must be willing to commit adequate resources.

The Department’s Progress: In January 2006, the Secretary approved a request from FSA to set up an
independent HR function on a pilot basis. Also this year, the Department focused on performance
management and worked with all Department managers to improve their understanding of performance
agreements and ratings. It hired a Deputy Human Capital Officer who is focused on improving HR issues
throughout the Department. We understand that it will soon release a new strategy for improving HR.

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