Financial Audit: Federal Family Education Loan Program's Financial
Statements for Fiscal Years 1993 and 1992 (Letter Report, 06/30/94,
GAO/AIMD-94-131).

GAO and the Education Department's Office of the Inspector General
audited the financial statements of Education's Federal Family Education
Loan Program and its internal controls and compliance with laws and
regulations for fiscal year 1993. GAO was unable to give an opinion on
the fiscal year 1992 financial statements because reliable student loan
data upon which to base the liabilities for loan guarantees was
unavailable. In addition, existing systems did not provide meaningful
and reliable financial management information needed to effectively
manage and report on program operations. Due to the limited amount of
time between the fiscal year 1993 and 1992 audits and the severity of
the long-standing financial management problems, many of the problems
identified during the previous year's audit still exist. For these
reasons, the opinions of GAO and the Inspector General on the fiscal
year 1993 financial statements, internal controls, and compliance with
laws and regulations are essentially the same as GAO's opinions covering
fiscal year 1992. GAO and the Inspector General found weaknesses in the
internal controls governing (1) how program costs are determined, (2)
how payments to guaranty agencies and lenders are monitored, and (3) the
accuracy of financial reporting. These weaknesses undermine Education's
ability to make loans available to all eligible students at a reasonable
cost to taxpayers. Also, without adequate financial information,
Congress and Education cannot be sure of the program's operating costs
or the extent of Education's liability for loan defaults.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-94-131
     TITLE:  Financial Audit: Federal Family Education Loan Program's 
             Financial Statements for Fiscal Years 1993 and 1992
      DATE:  06/30/94
   SUBJECT:  Internal controls
             Financial management
             Loan accounting systems
             Financial records
             Compliance
             Government guaranteed loans
             Accounting procedures
             Student loans
             Civil audits
             Financial statement audits
IDENTIFIER:  Federal Family Education Loan Program
             Guaranteed Student Loan Program
             National Direct Student Loan Program
             Dept. of Education National Student Loan Data System
             
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Cover
================================================================ COVER


Report to the Congress and the Secretary of Education

June 1994

FINANCIAL AUDIT - FEDERAL FAMILY
EDUCATION LOAN PROGRAM'S FINANCIAL
STATEMENTS FOR FISCAL YEARS 1993
AND 1992

GAO/AIMD-94-131 and ACN 17-30302

GAO/AIMD-94-131

GAO/AIMD-94-131 and ACN 17-30302 FFELP's FY 1993 Financial Audit


Abbreviations
=============================================================== ABBREV

  CFO - Chief Financial Officer
  FDSLP - Federal Direct Student Loan Program
  FFELP - Federal Family Education Loan Program
  GAO - General Accounting Office
  NSLDS - National Student Loan Data System
  OCFO - Office of the Chief Financial Officer
  OIG - Office of the Inspector General
  OMB - Office of Management and Budget
  OPE - Office of Postsecondary Education

Letter
=============================================================== LETTER


B-202873

June 30, 1994

To the President of the Senate and the
Speaker of the House of Representatives

In accordance with the Chief Financial Officers Act of 1990, GAO and
the Department of Education's Office of the Inspector General audited
the Principal Statements of the Department of Education's Federal
Family Education Loan Program (FFELP) and its internal controls and
compliance with laws and regulations for the fiscal year ended
September 30, 1993.  This report presents the results of this joint
audit.  It also describes Education's progress in developing better
financial information and controls to more effectively manage the
student loan program.  Education fully cooperated with us and has
begun significant efforts towards improving its financial
information. 

The significant matters this report discusses relate to determining
program costs, effectively monitoring payments to guaranty agencies
and lenders, and ensuring accurate financial reporting.  We found
that Education had material weaknesses in internal controls over each
of these areas that could lead to material losses of assets or
misstatements in the Principal Statements.  These weaknesses
undermine Education's ability to effectively and efficiently achieve
the program's mission of providing loan access to all eligible
students at a reasonable cost to taxpayers.  Also, without adequate
financial information, the Congress and Education's management cannot
know the program's operating costs or the extent of Education's
liability for loan defaults. 

We are sending copies of this report to the Secretary of Education
and other Department officials.  We are also sending copies to the
Secretary of the Treasury, the Director of the Office of Management
and Budget, the Chairmen and Ranking Minority Members of the Senate
Committee on Governmental Affairs and the House Committee on
Government Operations, and other interested congressional committees. 
Copies will be made available to others upon request. 

This report was prepared under the direction of John Hill, Director
for Audit Support and Analysis, GAO's Accounting and Information
Management Division, and Geraldine Jasper, Deputy Assistant Inspector
General for Audit, Department of Education's Office of the Inspector
General, who may be reached at (202) 512-8549 and (202) 205-8200,
respectively, if you or your staff have any questions.  Other major
contributors are listed in appendix IV. 

Charles A.  Bowsher
Comptroller General
of the United States




James B.  Thomas, Jr.
Inspector General
Department of Education


Letter
=============================================================== LETTER


B-202873


To the Secretary of Education

In accordance with the Chief Financial Officers (CFO) Act of 1990,
the Department of Education prepared the accompanying Principal
Statements for its Federal Family Education Loan Program (FFELP) for
the fiscal years ended September 30, 1993 and 1992.  Last year, GAO
was unable to give an opinion on the fiscal year 1992 statements
taken as a whole because reliable student loan data upon which to
base the liabilities for loan guarantees was not available.\1 In
addition, GAO reported that existing systems did not provide the
necessary meaningful and reliable financial management information
needed to effectively manage and report on the FFELP's operations. 
As a result of its audit for fiscal year 1992, GAO made 18
recommendations to Education; the status of Education's actions on
these recommendations is disclosed in appendix II. 

In response to GAO's audit reports covering fiscal year 1992,
Education officials expressed their commitment to developing better
financial management information and in establishing a sound internal
control structure for the FFELP and the planned Federal Direct
Student Loan Program.  A number of corrective actions are underway,
including the development of the National Student Loan Data System,
the first national database of loan-by-loan information on over 40
million loans awarded to borrowers.  In addition, Education is
developing its first agencywide strategic management plan and has
initiated efforts to design a system to identify key success measures
for major programs and support services. 

These initiatives ultimately should result in increased program
accountability.  However, we, as well as Education's management,
recognize that the Department still faces major challenges in
correcting systemic financial management problems.  A sustained
effort will be critical to sound financial management and reliable
financial information becoming routine at Education. 


--------------------
\1 Financial Audit:  Federal Family Education Loan Program's
Financial Statements for Fiscal Year 1992 (GAO/AIMD-93-04, June 30,
1993). 


   SUMMARY OF RESULTS
------------------------------------------------------------ Letter :1

GAO and Education's Office of the Inspector General (OIG) jointly
performed the fiscal year 1993 audit.  Due to the limited amount of
time between the fiscal years 1993 and 1992 audits and the severity
of the long-standing financial management problems, many of the
financial management problems identified during the prior year's
audit still exist.  For these reasons, our opinions on the fiscal
year 1993 financial statements, internal controls, and compliance
with laws and regulations are essentially the same as GAO's opinions
covering fiscal year 1992.  Our results are as follows. 

  We were unable to express an opinion on whether the fiscal year
     1993 (1) Statement of Financial Position, (2) Statement of
     Operations and Changes in Net Position, and (3) Statement of
     Budgetary Resources and Actual Expenses were fairly stated
     because reliable student loan data was not available.  The
     student loan data that was available was generally provided by
     the guaranty agencies and used by the Department in a model to
     calculate its costs to be incurred on outstanding guaranteed
     loans (referred to as liabilities for loan guarantees).  The
     inaccuracies in the data were so pervasive that we could not
     perform sufficient procedures to conclude whether the FFELP's
     liabilities for loan guarantees of $14 billion and other related
     line items were fairly stated as of September 30, 1993.  These
     are the most significant amounts in the FFELP Principal
     Statements. 

We determined, through detailed audit procedures, that the Statement
of Cash Flows presents fairly the cash flows of the FFELP for the
fiscal year ended September 30, 1993.  However, the Statement of Cash
Flows reports only the cash actually received and disbursed by the
FFELP.  Because of the material internal control weaknesses, detailed
in GAO's March 1993 report\2 and current year findings summarized in
the Significant Matters section of this report, we were unable to
determine if Education received or disbursed the proper amounts. 

  In our opinion, internal controls were not properly designed and
     implemented to effectively safeguard assets and assure that
     there were no material misstatements in the Principal
     Statements.  However, they were effective in assuring material
     compliance with budget authority and with significant provisions
     of selected laws and regulations. 

Ineffective internal controls and unreliable student loan data also
affected the reliability of information contained in Education's
annual budget submission and the Overview of the Reporting Entity. 
This information was generally derived from the same sources as the
information presented in the Principal Statements.  Consequently, the
reliability of information presented in the budget and the Overview
of the Reporting Entity cannot be reasonably determined. 

  Our tests for compliance with significant provisions of selected
     laws and regulations disclosed no material instances of
     noncompliance.  The limited tests we conducted would not
     necessarily detect all material instances of noncompliance,
     however, nothing came to our attention in the course of our work
     to indicate that material noncompliance with such provisions
     occurred. 

  Finally, nothing came to our attention to indicate that Education's
     report on internal controls prepared under the Federal Managers'
     Financial Integrity Act of 1982 conflicts materially with the
     results of our evaluation of the internal controls. 


--------------------
\2 Financial Audit:  Guaranteed Student Loan Program's Internal
Controls and Structure Need Improvement (GAO/AFMD-93-20, March 16,
1993). 


   MISSION AND OPERATING
   ENVIRONMENT
------------------------------------------------------------ Letter :2

FFELP's primary mission is to increase postsecondary education
opportunities for eligible students who otherwise may not be able to
further their education.  It operates on the premise that once
educated, the borrowers will earn income sufficient to repay their
loans.  Based on this premise, the program's net costs to taxpayers
should be minimal.  Education needs reliable information to
effectively manage this program and to assess the program's
performance in achieving its mission. 

Established in 1965, the FFELP, formerly known as the Guaranteed
Student Loan Program, is the largest postsecondary education loan
program of the federal government.  At September 30, 1993, Education
reported $69 billion in outstanding loan guarantees of which it
estimated that $16 billion, net of cancellations, were originated in
fiscal year 1993 alone.  It also reported paying over $3 billion in
1993 for interest subsidies and special
allowances,\3 net of loan origination fees, on certain loans to
lenders and loan defaults, net of collections, to guaranty agencies. 

The Department relies extensively on schools, lenders, and guaranty
agencies in making resources available to eligible students and
overseeing this program.  It also functions through a complicated and
cumbersome set of rules and requirements involving millions of
students and thousands of schools, lenders, and other entities.  As
shown in figure 1, the maze of responsibilities for the delivery
structure and processing sequence of a typical loan is complex. 

   Figure 1:  Federal Family
   Education Loan Program:  A
   Complicated and Cumbersome
   Process

   (See figure in printed
   edition.)

Education reinsures loans made by lenders to eligible students or
their parents in an effort to ensure the availability of private
capital.  Guaranty agencies reimburse lenders for loans that default
and generally recover default payments from the Department. 
Education also pays an interest subsidy and special allowance to
lenders on certain loans.  In addition, schools are required to
provide information to Education through guaranty agencies on the
current status of students participating in the program. 

As a result of this relationship, Education depends on the guaranty
agencies and lenders for accurate data in order for it to assess and
achieve its program mission.  The program's success is directly
affected by Education's relationship with and oversight of the 46
active guaranty agencies, approximately 8,000 lenders, and over 7,500
schools. 

The federal government's risk of incurring substantial program costs
has increased greatly as this program has expanded and evolved.  The
original plan was for a simple program involving unsubsidized loans
that did not require testing for financial need and relied on states
to guarantee the loans.  This approach fell apart almost immediately
because many states were reluctant to establish guaranty agencies. 
The program was replaced by the present system of interest subsidies,
special allowances, and federal guarantees. 

The FFELP has been on GAO's and the Office of Management and Budget's
(OMB) list of high-risk programs since each agency began this
designation in fiscal year 1990.  This designation is primarily
attributable to (1) the Department's long-standing financial and
program management problems, (2) the statutory complexity of the
program, and (3) the significant costs incurred by the federal
government for loans that default.  As of September 30, 1993, the
Department has paid, on a cumulative basis from the inception of this
program in 1965, default costs\4 totaling $21.5 billion and has
guaranteed over $145 billion, net of cancellations, in student loans. 

As GAO reported in its fiscal year 1992 report on the FFELP's
internal controls, the guaranty agencies' role in this program is
essentially that of a fiscal intermediary for the Department. 
Education is required by law to rely on the guaranty agencies to
carry out significant activities of the FFELP.  However, its
relationship with these guaranty agencies is not structured to give
Education sufficient leverage to improve aspects of the program
affected by guaranty agency operations.  For example, almost all of
the economic risk associated with guaranteeing student loans under
the FFELP is borne by the federal government.  At the same time,
Education is restricted by law from directly guaranteeing loans made
by lenders in a state or region where a guaranty agency is operating. 
Because of these conditions, traditional business incentives do not
govern Education's relationship with guaranty agencies. 

Some of the changes made to this program as part of the Higher
Education Amendments of 1992 and the Student Loan Reform Act of 1993
may provide Education with additional leverage to manage this
program.  For example, the Secretary is explicitly authorized to
terminate guaranty agency agreements if the Secretary determines that
such action is necessary to protect the federal fiscal interest. 
Moreover, the Secretary is authorized to take certain actions to
recover or preserve reserve funds, or assets purchased with reserve
funds, held by guaranty agencies.  Also, guaranty agencies may be
subject to criminal penalties for violating directions of the
Secretary in this area. 

In addition, the Student Loan Reform Act of 1993 requires the phase
in of the Federal Direct Student Loan Program starting in July 1994. 
Under this program, the Department will make loans directly to
borrowers through their participating schools.  As a result,
Education officials believe that the Federal Direct Student Loan
Program should decrease the number of guaranty agencies and lenders
involved in the FFELP over the next 5 years.  Also, Education expects
the Federal Direct Student Loan Program to streamline the student aid
process, reduce costs for students, and provide new repayment options
which could reduce future defaults.  The following table shows the
phase-in plan for this new program. 



                           Table 1
           
             Transition Period for Federal Direct
                     Student Loan Program

Academic year                  Percentage of new loan volume
-----------------------------  -----------------------------
1994-1995                      5

1995-1996                      40

1996-1997                      at least 50

1997-1998                      at least 50

1998-1999                      at least 60
------------------------------------------------------------
Like the current program, sound financial management will be critical
to the new direct student loan program for assessing performance and
program costs.  The strong internal controls that are central to good
financial management will also help ensure that eligible students
continue to have access to loans and that student and taxpayer
interests are protected. 

The following section of this report identifies the material
weaknesses that Education will need to rectify in order to strengthen
financial management and discusses the impact of these weaknesses on
the reliability of the information reported in the Principal
Statements.  Substantial improvements are necessary in each of these
areas in order for Education to develop and maintain the necessary
sound financial management structure needed to manage its activities. 


--------------------
\3 Special allowances are subsidies paid to lenders due to below
market interest rates on guaranteed loans. 

\4 The amount of default claims paid does not include death,
disability, or bankruptcy claims. 


   SIGNIFICANT MATTERS
------------------------------------------------------------ Letter :3

We found that the Department had material weaknesses in internal
controls over (1) estimating costs to be incurred on outstanding
guaranteed loans (referred to as liabilities for loan guarantees),
(2) assuring that billing reports from guaranty agencies and lenders
were accurate and that guaranty agencies and lenders reported all
default collections and origination fees, respectively, owed to the
Department, and (3) preparing accurate financial statements. 

During our audit, we noted that the Department continues to be unable
to ensure that loan data on participants in the FFELP is accurate. 
As a result, estimates of liabilities for loan guarantees based on
such data are unreliable as well.  We continued to find that
Education does not have systems or procedures in place to ensure that
billions of dollars in payments made to guaranty agencies and lenders
were reasonable.  We also found that fundamental accounting
procedures and system controls were not in place to ensure that
financial statements and other management reports were correct.  The
Department has several corrective actions underway including the
development of accounting systems and guaranty agency and lender
audit guidelines that, if successful, should significantly improve
its financial management. 

As a result of the Department's financial management problems related
to the FFELP, (1) the cost to the taxpayers for administering the
program cannot be accurately determined, (2) additional costs may be
incurred as a result of unverified payments made to guaranty agencies
and lenders, (3) management, the Congress, and other users of
reported information are making financial and operating decisions
based on unreliable information, and (4) the Department cannot
effectively ensure that only loans to eligible students are
guaranteed.  These material weaknesses in internal controls continue
to impede Education's ability to effectively manage the FFELP.  The
Department expects that the National Student Loan Data System will
help it address these problems. 


   UNRELIABLE LOAN DATA CONTINUES
   TO PREVENT REASONABLE ESTIMATES
   OF COSTS
------------------------------------------------------------ Letter :4

As of September 30, 1993, the Department reported liabilities for
loan guarantees of $14 billion.  In addition, $2.6 billion for
program costs was included in the fiscal year 1993 budget.  It is
essential that the Department have accurate student loan data in
order to (1) estimate costs to be incurred on outstanding guaranteed
loans, (2) manage loan defaults, and (3) assess its performance in
ensuring that loans are available to eligible students. 

However, Education developed its estimate of loan guarantees and
annual program costs using a model based on an analysis of historical
loan data which was not reliable.  Due to the number of entities
involved in providing information used in developing these estimates
and the range of errors we found, it was not practical to determine
the potential magnitude of such errors and their effect on the
FFELP's liabilities for loan guarantees as of September 30, 1993, or
their effect on program costs submitted in the annual budget process. 
Because of the data integrity problems identified by both us and the
Department, there is no way of knowing, at this time, the potential
misstatement to the financial and budgetary cost estimates. 

The internal control weaknesses we identified were caused largely by
the structure of this program, which sometimes limits Education's
practical ability to require guaranty agencies to correct the student
loan data errors that they have submitted.  Some of the recent
changes made to this program, as previously discussed, may provide
the Department with additional leverage to manage this program. 

Examples of the specific student loan data inaccuracies we found are
described below. 

  For 35 percent of the 662 borrowers we randomly tested and found on
     Education's annual tape extract\5 of student loan data, guaranty
     agencies had inaccurately submitted information to the
     Department.  For example, 229 of the 662 had incorrect amounts
     reported in the data field for "claims principal paid to
     lender." Twenty-two of these 229 cases had zero recorded in that
     data field, even though Education had paid a default claim. 
     This data is a key factor in determining the costs of
     outstanding guaranteed loans.  Some guaranty agency officials
     told us that Education's guidelines are vague as to what
     information should be submitted by the guaranty agencies.  For
     instance, Education's guidance as to what should be submitted by
     guaranty agencies as "claims principal paid to lender" and
     "default outstanding" does not clearly differentiate as to what
     should be reported. 

  The Department's tape extract reviews performed between March 1992
     and January 1993 of 33 guaranty agencies identified similar
     problems with accuracy.  As GAO noted in its audit of the fiscal
     year 1992 financial statements, Education found that the
     "date-entered-repayment" data field was incorrect for all 130
     files it reviewed at one of the largest guaranty agencies.  The
     Department also found discrepancies in the
     "date-entered-repayment" data field at 25 other guaranty
     agencies.  In addition, discrepancies were found by Education in
     another key data field, "enrollment-status-code," at 27 of the
     33 guaranty agencies reviewed. 

Both of these data elements are important in developing loan subsidy
estimates for financial reports.  Education found that inaccuracies
occurred because some guaranty agencies were not using current loan
status data received from the lenders or schools and, instead, were
recording estimates for certain data elements.  Several of the
guaranty agencies we visited stated that they are trying to correct
the data errors.  However, due to its time constraints, Education has
not yet followed up on the status of corrective actions at each
agency. 

  Some of the data on the tape extract was clearly wrong, such as
     borrowers defaulting\6 prior to the date that the loans were
     made and loans made prior to the initiation of this program in
     1965.  In addition, 13 of the 725 borrowers we tested at the
     guaranty agencies were missing from the tape extract.  While the
     percentages of these errors were small, they further demonstrate
     the unreliability of this data. 

In addition to the above problems, the tape extract used by the
Department consists of data that is at least 6 to 9 months old and is
only updated on an annual basis.  Also, we found that guaranty
agencies made little effort to verify the accuracy of tape extract
information before it was submitted to Education.  For fiscal year
1993, only 23 of the 46 guaranty agencies' tape submissions were
accepted by Education when first submitted. 

As a result of these problems, Education has worked more closely with
the guaranty agencies in trying to understand and resolve some of the
student loan data errors.  In addition, the Department is continuing
to develop the National Student Loan Data System.  It plans to have
this system updated weekly or monthly and use it to prevent borrowers
who have defaulted on loans or reached maximum award levels from
receiving additional loans.  The Department currently expects to
implement the first phase of the system in September 1994, at which
time guaranty agencies' submission of tape extracts will no longer be
required.  The National Student Loan Data System is expected to be
fully operational in May or June 1995. 

The Department reported in its Federal Managers' Financial Integrity
Act Report for fiscal year 1993 that it expects to save $300 million
per year in inappropriate awards being made when this system is fully
operational.  However, Department officials informed us that some of
these savings are already being realized through interim efforts to
match student financial aid applicants to defaulters on the annual
tape extract.  A significant benefit of the National Student Loan
Data System will be that more current default data would be available
and that it would assist the Department in ensuring that loan limits
are not exceeded. 

An important factor to the success of the National Student Loan Data
System is how guaranty agencies implement systems to provide accurate
and timely student loan data to Education.  This information will be
required at a time when the guaranty agencies' revenue base is
declining and the Department is phasing in a direct lending program. 
Until the National Student Loan Data System is fully operational and
the data reliable, decisionmakers--including the Congress--do not
have the information necessary to make fully informed decisions about
the program. 


--------------------
\5 Guaranty agencies submit annually to Education tape extracts or
"dumps" of selected information.  Education uses this data for a
variety of analyses, including financial and budgetary estimates. 

\6 The default date was determined by using the loan status date for
all loans in default.  The loan status date should be representative
of the date in which the default (that is, last action) occurred. 


   CONTROL WEAKNESSES RESULT IN
   BILLIONS OF UNVERIFIED PAYMENTS
------------------------------------------------------------ Letter :5

During fiscal year 1993, the Department paid $1.8 billion to 46
guaranty agencies for loan defaults net of collections and $1.4
billion to approximately 8,000 lenders for interest subsidies and
special allowances net of loan origination fees.  In order to ensure
that guaranty agencies and lenders are paid accurately for defaults,
interest subsidies, and special allowances, the Department needs to
know that billing reports from the guaranty agencies and lenders are
accurate and valid. 

However, as reported by GAO in March 1993,\7 Education did not have
systems or procedures in place to ensure that individual billing
reports submitted by guaranty agencies and lenders were reasonable. 
In addition, GAO reported that Education and guaranty agencies'
external audits were broad in scope and auditors were not required
to, and therefore did not conduct, in-depth examinations of the
accuracy and validity of guaranty agencies' and lenders' claims for
defaulted loans, interest subsidies, and special allowances.  As a
result, these audits generally did not provide assurance to the
Department as to the accuracy of claims submitted or to the adequacy
of the guaranty agencies' and lenders' internal controls over such
claims. 

During our fiscal year 1993 audit, we found that Education continued
to pay claims without assurance that the moneys reported on the
billing reports were accurate and valid.  We found that it did not
reasonably ensure that: 

  collections from defaulted loans that offset default payments to
     guaranty agencies were reported timely,

  loan origination fees that reduce interest subsidy and special
     allowance payments to lenders were reported, and

  default reimbursements, administrative cost allowances, interest
     subsidies, and special allowances paid to guaranty agencies and
     lenders totaling billions of dollars were proper. 

Highlights of these findings follow. 


--------------------
\7 Financial Audit:  Guaranteed Student Loan Program's Internal
Controls and Structure Need Improvement (GAO/AFMD-93-20, March 16,
1993). 


      DEFAULT COLLECTIONS
---------------------------------------------------------- Letter :5.1

During fiscal years 1993 and 1992, guaranty agencies did not report,
within the required reporting time\8 $111 million and $133 million,
respectively, of offsetting cash collections.  We found that on one
or more monthly reports submitted during this 2-year period, about 30
of the 46 guaranty agencies reported cash collections totaling $14
million to the Department at least 6 months after the guaranty
agencies received the money.  This resulted in payments to the
guaranty agencies in amounts greater than should have been paid,
since offsetting receipts should have been higher than those reported
by the guaranty agencies.  Several guaranty agencies attributed
delayed reporting of collections to collection agents not submitting
information to them on time.  However, it is the responsibility of
the guaranty agencies to ensure that necessary information be
received so as to meet the Department's reporting requirement. 
Beginning with billing reports received in July 1993, the Department
has assessed interest penalties on guaranty agencies for late
reporting of collections. 

Of the 16 guaranty agencies we visited, 5 did not reconcile actual
cash collections to that reported on their billing reports submitted
to Education for reimbursement.  In one instance, we found that
actual cash collections did not agree with those reported on the
billing report, which resulted in the Department paying about
$240,000 less than it should have.  This error would have been found
if reconciliations were performed on actual cash collections to cash
collections reported on the billing report.  While in this instance
an underpayment occurred, this weakness clearly shows that the
opportunity for overpayments to occur and go undetected exists. 


--------------------
\8 Education required guaranty agencies to report its share of
borrower payments on loan defaults within 60 days of receipt of funds
from borrowers.  In May 1993, Education notified guaranty agencies
that starting July 1, 1993, it would assess interest on such payments
not reported 45 days after receipt of funds. 


      LOAN ORIGINATION FEES
---------------------------------------------------------- Letter :5.2

Some lenders were not submitting billing reports to Education
promptly, within 90 days after the end of the quarter, as instructed
by Education.  During fiscal year 1993, lenders were required to
report to the Department loan origination fees of 5 percent on most
FFELP loans.  These origination fees are offset against interest
subsidies and special allowances owed to the lenders by Education on
the quarterly billing reports.  Therefore, a lender may owe the
Department money if origination fees are great enough.  GAO and
Education's OIG have each previously reported\9 that lenders were not
submitting loan origination fees to Education promptly.  We continued
to find that delays were common.  For example, 2,027 of the 10,962
lender billing reports received for the quarter ended September 30,
1993, were not submitted within a 90-day time frame, and 1,426 of
these had not been submitted after 180 days. 

In addition, as GAO reported in its March 1993 report, the Department
continues to be unable to determine whether origination fees are
received from lenders when loans are sold.  Lenders sometimes sell
loans before paying the related origination fees, and Education's
regulations provide that either the seller or the buyer can pay the
fee.\10 Lender billing reports do not contain detailed information on
individual loans, and lenders are not required to inform the
Department as to who is paying the fee for a particular loan.  We
found that total reported loans sold differed from total reported
loans purchased for the first three quarters of fiscal year 1993, by
amounts ranging from $295 million to $671 million, and that Education
had not investigated or reconciled the differences because the system
cannot track individual loan sales and purchases.  As a result, it
did not have the information needed to detect the nonpayment of
origination fees when loans were sold. 

The Department is currently completing a pilot study to determine the
magnitude of unreported origination fees due from lenders.  This
study is being performed in one region of the country.  Preliminary
results of this study found that small- to medium-size lenders
continue to sell their loans quickly with no incentive to report the
loan origination fees to Education.  An Education official working on
this study believes that these billing reports are not being
submitted because the lenders might owe more in origination fees to
the Department than the amount it is owed for interest subsidies and
special allowances--a billing report would show that the lenders owed
Education money. 

From this limited study, Education found that hundreds of thousands
of dollars are potentially owed to the Department.  In an effort to
identify and collect origination fees from lenders who have not filed
quarterly billing reports, the Department is planning to expand this
effort nationwide.  We believe that the Department may be losing
significant amounts of loan origination fees owed by lenders. 

In addition, the Department has a quality improvement team reviewing
ways to improve controls over the collection of loan origination
fees.  The team is analyzing the 1993 tape extract to identify
lenders who originated loans in 1993 but failed to report origination
fees to Education.  The Department plans to give the lenders
opportunities to confirm whether the fees have been paid.  If a
lender fails to respond, Education plans to notify the lender and
guaranty agency that the Department has cancelled reinsurance on the
loans in question.  Education officials informed us that after
establishment of the National Student Loan Data System, their ability
to track individual loans on a more timely basis will greatly
improve. 


--------------------
\9 Stafford Student Loans:  Prompt Payment of Origination Fees Could
Reduce Costs (GAO/HRD-92-61, July 24, 1992).  Proposed Procedure to
Ensure Payment of Loan Origination Fees for Stafford Loans (OIG MIR
No.  90-10). 

\10 Education's regulations also provide that the originating lender
and any subsequent holder are jointly and severally liable for
payment of the origination fee on the loan. 


      INTEREST SUBSIDIES
---------------------------------------------------------- Letter :5.3

The Department was paying interest subsidies on some loans that could
have been ineligible for this subsidy.  On certain loans, Education
is responsible for paying interest subsidies to lenders as long as
the student is in school and during authorized grace and deferment
periods.  Once a loan enters repayment status, the Department is no
longer responsible for paying these interest subsidies.  Federal
regulations require that guaranty agencies establish procedures for
monitoring the enrollment status of students participating in this
program.  Guaranty agencies must obtain enrollment status information
from schools semiannually.  They must report to the current holder of
the loan, generally a lender, within 60 days any change in status
that triggers the beginning of the borrower's grace period or the
beginning or resumption of the borrower's immediate obligation to
make scheduled payments. 

We found that 43 of the 595 student loan accounts that we tested at
selected lenders had inaccurate loan statuses based on information
provided to us from schools.  Twenty-six of the 43 had not been
eligible for interest subsidies for more than 6 months according to
information that we received from schools; however, the lenders had
continued to bill Education for payment during this time.  In one
case, even though a student had left school in March 1992, interest
subsidy payments were included on a March 1993 billing report to the
Department.  Prior to our identifying these cases, the lenders were
unaware that some of these loans were ineligible for interest
payments.  We also found 9 cases in which interest subsidies were
charged to Education, but the schools, identified to us by the
lenders, had no record of the students' enrollment during that
reporting period. 


      EXTERNAL AUDITS
---------------------------------------------------------- Letter :5.4

Each of the 16 guaranty agencies we visited had their fiscal year
1992 and 1993 financial statements audited by external auditors. 
However, after speaking with the auditors and reviewing their working
papers, we found that these efforts focused on broad objectives of
determining whether financial statement balances were fairly and
reasonably presented.  While these audits appeared to have been
performed in accordance with applicable standards, Education had not
yet issued specific audit guidelines addressing the accuracy of
billings for external audits of guaranty agencies.  As such, the
auditors conducted only limited tests of the accuracy of the billing
reports of the guaranty agencies.  For example, in testing the
agencies' receivables from Education for loan defaults, the external
auditors generally verified that the receivable balances were fairly
presented based on the agencies' cash collections from Education. 
These audits did not test whether Education's payments to the
guaranty agencies were reasonable.  As a result, the Department
continues to have little assurance that bills it pays are correct. 
This issue was discussed in more detail in GAO's March 1993 report. 

Recognizing the necessity for verifying the accuracy and validity of
moneys paid to guaranty agencies and lenders and the impracticality
of performing assurance procedures themselves, the Department is
developing a guaranty agency audit guide and a lender audit guide
that would require external auditors to determine whether claims for
payments submitted to Education are reasonable.  Without such a
control, the federal government has increased risk of paying
incorrect amounts for loan defaults, interest subsidies, and special
allowances, losing revenue, and guaranteeing loans to ineligible
students. 


   FINANCIAL REPORTING INTERNAL
   CONTROL WEAKNESSES PERSIST
------------------------------------------------------------ Letter :6

To ensure that reliable and meaningful information is developed for
the Department's management and the Congress to use as a basis for
making decisions, a number of basic internal controls need to be in
place, such as reconciliations, which ensure that transactions posted
to accounting records are properly supported and system change
controls which ensure that unauthorized system changes cannot be
made.  Such controls are designed to ensure the integrity and
accuracy of financial information decisionmakers rely on to manage
the program. 

Although the Office of the Chief Financial Officer (OCFO) and the
Office of Postsecondary Education (OPE) have made improvements in
financial reporting for the FFELP, Education's financial reporting
process\11 continues to be inadequate.  As a result, management
cannot ensure that the financial statements and other management
reports are reliable. 

Weaknesses identified during the fiscal year 1993 FFELP financial
audit were similar to those identified during the audit for fiscal
year 1992 and primarily resulted from

  the general ledger being antiquated and inefficient,

  permanent subsidiary ledgers not established and maintained for
     FFELP activities, and

  general controls over information and accounting systems not
     functioning as designed. 

Education is redesigning its financial management system.  This
project is expected to result in an integrated financial management
system and to be phased in over a 3-year period beginning in fiscal
year 1995.  If successful, this system should be instrumental in
assisting the Department in addressing the financial reporting
problems we found.  Specifically, we found the following. 

  Education's general ledger system was unable to directly produce
     the FFELP financial statements because it was outdated and was
     designed primarily for funds control.  As a result, the
     Department's management had to develop alternative approaches,
     including the purchase of an additional software package and the
     use of contracted services, to create these statements and to
     enable it to prepare agencywide statements in the near future. 

  As a result of GAO's recommendations reported in March 1993, the
     Department established interim subsidiary ledgers for the FFELP. 
     However, these interim subsidiary ledgers did not include all
     activity affecting loan receivable balances because of their
     inability to record adjusting entries and were not considered by
     the Department to be permanent subsidiary ledgers.  Therefore,
     reconciliations were not performed between the general ledger
     balances and the interim subsidiary ledger balances.  The
     Department did, however, perform monthly reconciliations of
     general ledger activity and interim subsidiary ledger activity
     to activity reported in the FFELP information systems.  Although
     these reconciliations should ensure that all activity recorded
     in the FFELP information systems were recorded in the general
     ledger and interim subsidiary ledgers, they do not ensure that
     loans receivable balances reported in the financial statements
     are complete and accurate. 

The loans receivable balances represent default claims paid that have
not been collected or written off.  Education's accounting policy is
to record this receivable net of amounts not expected to be collected
as an offset to its liability for loan guarantees.  In order for the
Department to know what moneys are owed as well as whether all moneys
owed are being collected and reported, it is critical that subsidiary
ledgers be established, maintained, and reconciled to the general
ledger.  The Department is currently enhancing the subsidiary ledger
process to enable the interim subsidiary ledgers to record adjusting
entries.  In addition, it has initiated a task order to develop
permanent subsidiary ledgers which should be operational in fiscal
year 1996. 

  At the time of our review, Education did not have effective general
     controls\12 over information systems to safeguard assets,
     maintain the confidentiality of student loan data, and ensure
     the reliability of financial management information.  We found
     that (1) controls over access to data and computer programs were
     ineffective, (2) computer security administration needed
     strengthening, (3) system software change controls were
     inadequate, and (4) computer disaster recovery plan testing and
     evaluation procedures were insufficient. 

To address these weaknesses, the Department and its contractor have
taken corrective actions such as (1) reducing system software
programmers' access to FFELP data by approximately one-third, (2)
developing a system to monitor activities of personnel with
broad-based or privileged access to FFELP data, and (3) enhancing the
disaster recovery program.  In addition, the Department is
establishing formal policies and procedures for security
administration functions and expects to complete this project by
September 1994. 

  Likewise, the general controls over Education's general ledger
     system did not adequately restrict access to data files,
     computer programs, and system software.  Security responsibility
     is spread out, with no one person having responsibility for the
     overall system.  This has resulted in gaps in security
     oversight.  For example, we found that (1) weaknesses identified
     in prior general ledger security reviews had not been corrected,
     (2) two of eight system administrators still had access to the
     system after they were no longer employed with the Department or
     by its contractor, (3) an audit trail on user activities was not
     properly maintained, and (4) passwords were not changed unless
     requested by the users.  Based on our discussions with Education
     officials, no one had clear responsibility for oversight of
     overall system security.  This responsibility would include
     oversight of system administrators, who, among other job
     functions, created and distributed user passwords.  In addition,
     we found that staff assigned to manage this system had limited
     or no security training.  Also, the disaster recovery plan had
     not been finalized or tested for the general ledger system.  As
     a result of these weaknesses, unauthorized changes and access to
     data files, computer programs, and system software could occur
     within the general ledger system without detection. 


--------------------
\11 This financial reporting process includes analyzing, evaluating,
summarizing, reconciling, adjusting, and reclassifying information so
that it may be reported to management and/or outsiders.  Accounting
and information systems supporting the FFELP are an integral part of
this process. 

\12 General controls over accounting and information systems include
reviewing changes to application and system software, system
development design practices, segregation of duties,
telecommunications, disaster recovery and contingency planning, and
data security. 


   OTHER MATTERS
------------------------------------------------------------ Letter :7

In addition to the material internal control weaknesses just
discussed, other matters came to our attention during the audit that
we felt should be highlighted within this report.  These matters
included concerns about (1) Chief Financial Officer (CFO)
responsibilities, (2) budget formulation, (3) other program cost
estimation issues, and (4) the Federal Direct Student Loan Program. 
We believe that each of these areas offers opportunities for the
Department to significantly improve its internal controls and
financial management of this program. 


      CFO ORGANIZATIONAL STRUCTURE
---------------------------------------------------------- Letter :7.1

Education's current organizational structure could make it difficult
for the CFO to effectively perform certain responsibilities under the
Chief Financial Officers Act of 1990.  The CFO Act and OMB's February
1991 implementing guidance to agencies on preparing CFO
organizational plans outline the agency CFO's authority and role in
improving the agency's organizational structure and systems. 
Specifically, under the act and OMB's guidance, the agency CFO's
responsibilities include, among other things, (1) overseeing all
financial management activities relating to the programs and
operations of the agency, (2) developing and maintaining an
integrated agency accounting and financial management system,
including financial reporting and internal controls, and (3)
directing, managing, and providing policy guidance and oversight of
the development of agency financial management budgets.  Education's
CFO structure could limit the CFO's ability to carry out these
responsibilities effectively because budget functions and program
financial management and related systems are not direct
responsibilities of the CFO. 

Prior to August 1993, Education's CFO had responsibility for budget
functions.  At that time an organizational change occurred and the
Secretary reported to OMB that the CFO should not be responsible for
the budget functions because (1) the budget and evaluations functions
are integral elements of the Department's process for formulating
policy and should be closely coordinated under the responsibilities
of the Under Secretary and (2) the CFO would have to focus more on
budget matters than on important financial management matters and on
integrating the Department's financial information systems.  The
Secretary informed GAO that the Department believes that the current
organizational structure should ensure greater attention to financial
management issues than under the old organization where these matters
were often overshadowed by budget concerns. 

We are concerned, however, that the lack of these budget
responsibilities for (1) budget functions and (2) program financial
management and related systems that feed into the general ledger
could make it difficult for the CFO to effectively support good
financial management, including the development and maintenance of
integrated accounting and financial management systems and the
reporting of complete, reliable, consistent, and timely information. 

In our view, the ideal situation would be that the CFO have direct
input into an agency's annual budget process, the ability to review
the validity of estimates made and the reliability of the assumptions
used, and sign-off authority before formal budget submissions are
made.  A review of the CFO organization functions for the 23 agencies
covered by the act shows that 20 CFOs are responsible for budget
formulation and execution.  Education is only 1 of 3 agencies covered
by the act whose CFO does not have these responsibilities. 

We believe it is important that the Department continue to monitor
the effectiveness of its current structure to ensure that the
objectives of the CFO Act are met.  We also believe it is important
that the Under Secretary and the Assistant Secretary for
Postsecondary Education continue to work closely with the CFO in
supporting good financial management and ensuring that the CFO is
able to effectively perform certain responsibilities under the act. 


      BUDGET FORMULATION CONCERNS
---------------------------------------------------------- Letter :7.2

The estimate of FFELP's program costs continues to be a major budget
formulation concern.  As GAO reported in the fiscal year 1992
financial audit of FFELP, Education's estimates of FFELP's costs,
which are incorporated in Education's annual budget submission, were
derived using the same unreliable data and internal control
deficiencies as its liabilities for loan guarantees.  Because there
is no evidence, as demonstrated from our fiscal year 1993 FFELP
financial audit, that this condition has significantly improved, the
accuracy of projected program costs continues to be questionable. 

For example, Education estimated that for certain types of loans
guaranteed in fiscal year 1993, it would pay an interest subsidy in
that year for 89 percent of borrowers receiving subsidized loans. 
However, upon subsequent analyses and discussion with the
Congressional Budget Office, Education determined that in fiscal year
1993 it would most likely pay an interest subsidy for 98 percent of
those borrowers.  Primarily, as a result of this change, Education's
estimate for the cost of loans guaranteed in fiscal year 1993 was
increased by $476 million.  For fiscal years 1994 and 1995,
Education's model was adjusted to reflect more realistic percentages
of students for which interest subsidies would be made. 

In addition, Education continued to use some assumptions in its model
for estimating program costs which were more optimistic than
historical data adjusted for program changes would support. 
Specifically, we found that assumptions were overly optimistic
related to (1) the percentage of loans estimated to default in the
future and (2) future interest rates. 

First, Education assumed a lower than adjusted historical default
rate.  It used 15 percent as a projected default rate while, based on
adjusted historical data, we believe that 20 percent should have been
used.  As reported in GAO's fiscal year 1992 financial audit of
FFELP, Education continued to base its assumed lower default rate on
legislation and program initiatives designed to reduce defaults. 
Although such legislation and program initiatives should result in
lower default rates, we found no basis to support the level of change
that Education had projected (a 25 percent reduction in defaults as
compared to adjusted historical data). 

Recognizing that the underlying data itself is questionable, we
recalculated the FFELP projected loan defaults using what we believe
to be a more realistic rate.  Our rate was developed by reviewing the
program's historical trends at Education and guaranty agencies.  We
also made adjustments for anticipated improvements due to the
legislation referred to earlier.  These adjustments were
significantly less than Education's because the default reduction
tool, which eliminates schools with high default rates, has not yet
proven to have as significant of an effect on default rates as
Education had projected.  In addition, we believe that other recent
legislation, including allowing more students to receive loans and
increasing loan limits, could result in increased defaults in the
future. 

Considering our recalculated default rate, Education's estimate of
the cost to taxpayers for loans guaranteed in fiscal years 1994 and
1995 could be understated by as much as $800 million.  Education
expects to guarantee about $18.2 and $15.2 billion in loans in fiscal
years 1994 and 1995, respectively.  The President's budget included
estimated costs\13 of $2.3 billion and $1.8 billion for new loan
guarantees in those respective years.  Using what we believe to be a
more realistic default rate, but the same underlying data used by
Education, the cost to taxpayers for these loans could be as high as
$2.6 billion and $2.3 billion for fiscal years 1994 and 1995,
respectively. 

Secondly, Education's model was also optimistic as to projected
interest rates.  Education estimated, based on 6-year interest rate
projections provided by OMB, that no special allowance would have to
be paid over the next 16 years for loans guaranteed in fiscal years
1993 through 1995.  Its budget estimates relating to such loans could
be significantly understated.  We question Education's assumption
regarding special allowances due to the inherent uncertainty
associated with interest rates over such a long period of time. 

Education's continued use of these optimistic assumptions could
affect the usefulness of its program cost estimates to those making
program decisions as well as require substantial use in future years
of the permanent indefinite budget authority provided for reestimates
under the Federal Credit Reform Act of 1990.\14 The Department has
initiated efforts to have a contractor review some of its loan model
assumptions.  It plans to make any needed changes to its assumptions
based on the results of this review, which is expected to be
completed during the summer of 1994. 

It is very important to note that because budgeted program costs were
derived using the same unreliable data and internal control
deficiencies as Education's liabilities for loan guarantees, there is
simply no way of knowing at this time the full range of error for the
potential misstatement of Education's budget estimates for loans
guaranteed in fiscal years 1993 through 1995. 


--------------------
\13 In accordance with the Federal Credit Reform Act of 1990, the
cost included in the budget represents the net present value of
expected future cash flows. 

\14 The Federal Credit Reform Act of 1990 changed the budget
treatment of loans and loan guarantees made on or after October 1,
1991, to more accurately reflect the cost to the government. 


      OTHER PROGRAM COST
      ESTIMATION ISSUES
---------------------------------------------------------- Letter :7.3

In fiscal year 1993, Education was unable to follow OMB's guidance to
estimate and reestimate program costs because three of the largest
guaranty agencies did not provide necessary loan data.  OMB Circular
A-11 contains what OMB characterizes as instructions and guidance for
agency use in estimating and reestimating credit program costs under
the Federal Credit Reform Act of 1990.  Using these instructions,
agencies would have to categorize each outstanding loan guarantee and
separately estimate, or reestimate, the costs of loan guarantees in
each category.  Since Education determined that collecting data on an
individual loan level would have been extremely burdensome to its
program participants, OMB agreed that Education could estimate and
reestimate costs of loan guarantees using a random sample of
guaranteed loans in the FFELP portfolio. 

However, 3 of the largest guaranty agencies, from which Education had
planned to obtain more than half of the sample records, did not
provide these records to Education.  Further, as a result of the
relationship between Education and the guaranty agencies discussed
earlier, Education's subsequent attempts to obtain the sample records
from these guaranty agencies were unsuccessful.  Accordingly,
Education was unable to estimate and reestimate program costs in the
manner agreed to by OMB.  Instead, Education relied on the tape
extract data, which as discussed earlier was highly questionable, to
develop estimates and reestimates of program costs as it had in the
past. 

As previously mentioned, the Department is dependent on the guaranty
agencies to provide timely and accurate loan information.  However,
as evidenced by the Department's experience relating to loan
estimates and reestimates, its practical ability to require that
accurate and timely data be submitted is limited. 


      FEDERAL DIRECT STUDENT LOAN
      PROGRAM
---------------------------------------------------------- Letter :7.4

The Federal Direct Student Loan Program (FDSLP) is expected to save
taxpayers billions of dollars and substantially improve the student
loan process.  The successful implementation of this program will be
critical to ensuring continued loan access to eligible students as
the FFELP is phased down over the next 5 years. 

Education expects the FDSLP to streamline the student aid process,
reduce costs for students, and provide new repayment options which
could reduce future defaults.  Education also expects to save
taxpayers an estimated $4.3 billion primarily by (1) the reduction of
interest subsidies to lenders, (2) the reduction in payments to
guaranty agencies and lenders participating in the FFELP as the FDSLP
is phased in over the next 5 years, and (3) new savings introduced to
the FFELP through additional fees.  The Department believes that part
of these substantial savings will be used to reduce interest rates
for student borrowers when the program is fully implemented. 

Since August 1993, Education has made progress in implementing the
FDSLP.  For example, the Department reported that it selected
participating schools for the 1994-1995 academic year 6 weeks ahead
of its schedule, published regulations on time, and awarded the
contract for origination and servicing of direct loans on schedule. 

As the program gets underway, Education officials believe that the
future loan volume and current profit margins of guaranty agency
businesses will be reduced, causing some of the current 46 active
guaranty agencies to withdraw from the FFELP.  In an effort to ensure
continued loan access under the FFELP and a smooth transition to
direct lending, Education contracted with a private nonprofit agency,
Transition Guaranty Agency, to perform, as a last resort, guaranty
agency functions of servicing outstanding loan portfolios and
providing new guarantees.  In addition, Education has negotiated an
agreement with the Student Loan Marketing Association (Sallie Mae) to
assume responsibilities as a "lender of last resort."\15 With these
agreements in place, the Secretary believes that every eligible
student can continue to have access to loans. 

Education is under pressure to meet tight statutory deadlines for
implementing the program and gaining needed school participation and
support.  In addition, loan volume is supposed to increase by 700
percent in the second year of operation (from 5 percent of the
Department's current loan volume to 40 percent in the second year)
and increase further still in future years (see table 1).  As a
result, we believe the Department faces a significant challenge of
ensuring that these pressures do not prevent it from implementing the
necessary internal controls as the FDSLP is phased in and the FFELP
is phased down. 


--------------------
\15 An entity required to make loans to eligible students who were
unable, after conscientious efforts, to obtain funds from other
entities.  Guaranty agencies are also "lenders of last resort."


   CONCLUSIONS
------------------------------------------------------------ Letter :8

The Department of Education faces many challenges in addressing its
long-standing financial management problems, most important of which
is correcting the numerous data integrity problems underlying the
financial management systems.  The problems we identified are not
ones that lend themselves to "quick fixes" but rather require
comprehensive efforts to correct root causes. 

In addition to these challenges, there is a continuing need to deal
with federal budgetary pressures and the call for government to
reinvent itself by managing better with fewer resources.  To
accomplish this, the Congress, as well as Education's managers, need
financial management information that is meaningful and accurate in
order to make sound decisions.  The need to correct long-standing
problems in financial operations becomes even more critical as
Education starts lending directly to students under the Federal
Direct Student Loan Program.  Otherwise, the same problems that are
affecting Education's guaranteed loan program could also pervade the
new direct loan program. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :9

A summary of the status of GAO's recommendations from the audit of
FFELP's fiscal year 1992 financial statements is included in appendix
II.  While Education made progress during fiscal year 1993 in
addressing many of these recommendations, few of these efforts have
been completed due to the limited time since the prior year's audit
and the severity of the financial management problems.  Education
expects that several of these recommendations will be addressed
through its implementation of the National Student Loan Data System
(NSLDS) and the Federal Direct Student Loan Program.  We believe that
if the improvement efforts are successful they could significantly
improve accountability in the FFELP. 

We reaffirm all of GAO's previous recommendations included in
appendix II that have not yet been completed by the Department.  We
especially emphasize the need for the Department to continue its
efforts to (1) require guaranty agencies to correct data needed as
input into the NSLDS, (2) require guaranty agencies and lenders to
have external auditors perform procedures to determine whether claims
for payments submitted to Education are reasonable, (3) test billing
reports as part of the guaranty agencies and lenders internal
reviews, (4) develop and maintain subsidiary ledgers for the FFELP,
and (5) develop procedures to ensure that the general ledger
maintained by OCFO is periodically reconciled to subsidiary ledgers
maintained by OPE. 

In addition, we continue to suggest that the Congress consider
amending the Higher Education Act to require that originating lenders
pay loan origination fees even if the loan is subsequently sold to
another lender. 

As a result of our audit of FFELP's fiscal year 1993 financial
statements, we recommend that the Secretary of Education direct the
Assistant Secretary for Postsecondary Education to perform periodic
analyses to determine whether lenders are submitting billing reports
promptly, within 90 days after the end of the quarter, as instructed
by Education.  These analyses should include follow-up procedures
with individual lenders not submitting billing reports promptly. 

We also recommend that the Secretary of Education direct the
Assistant Secretary for Human Resources and Administration to clearly
identify security responsibilities and oversight for Education's
general ledger system, including establishing a security officer
responsible for the overall security of this system.  The security
officer's responsibilities should include

  developing and completing action plans to respond to previously
     reported security weaknesses,

  properly maintaining and reviewing an audit trail of user
     activities,

  ensuring that former contractors and terminated employees are
     denied access to the system,

  changing passwords periodically (possibly monthly or quarterly),
     and

  finalizing and testing a disaster recovery plan for the general
     ledger system. 

In addition, the Assistant Secretary for Human Resources and
Administration should require and ensure that security administrators
and supporting technical staff, who are responsible for the general
ledger system, have security training. 


   AGENCY COMMENTS AND OUR
   EVALUATION
----------------------------------------------------------- Letter :10

The Department provided comments on a draft of this report, which are
reprinted in appendix III.  In general, it agreed with our
recommendations and plans to determine the best way to proceed to
achieve the desired results.  With respect to the section of the
report that highlights concerns about the CFO organizational
structure, however, the Department believes that the current CFO
structure enables it to meet all the CFO Act's responsibilities.  As
stated in this report, we continue to believe that it is important
that the Department continue to monitor the effectiveness of its
current structure to ensure that the objectives of the CFO Act are
met. 



--------------------------------------------------------- Letter :10.1

In closing, we would like to commend the Department for its
second-year effort to develop financial statements.  We believe that,
although many challenges still remain, the Department's progress to
date represents its commitment toward the CFO Act's ultimate goal of
improving financial management throughout the federal government. 

Charles A.  Bowsher
Comptroller General
of the United States




James B.  Thomas, Jr.
Inspector General
Department of Education

May 20, 1994


FINANCIAL STATEMENTS
============================================================ Chapter 0

   Overview of the Reporting
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   Statements of Budgetary
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   Notes to the Principal
   Financial Statements

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OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I

Management is responsible for

  preparing the annual financial statements in conformity with
     applicable accounting principles,

  establishing and maintaining internal controls and systems to
     provide reasonable assurance that the broad control objectives
     of the Federal Managers' Financial Integrity Act are met, and

  complying with applicable laws and regulations. 

We are responsible for obtaining reasonable assurance about whether
(1) the Principal Statements are reliable (free of material
misstatements and presented fairly in accordance with applicable
accounting principles) and (2) relevant internal controls are in
place and operating effectively.  We are also responsible for testing
compliance with significant provisions of selected laws and
regulations and for performing limited procedures with respect to
certain other information appearing in these annual financial
statements. 

In order to fulfill these responsibilities, we

  examined, on a test basis, evidence supporting the amounts and
     disclosures in the Principal Statements;

  assessed the accounting principles used and significant estimates
     made by management;

  evaluated the overall presentation of the Principal Statements;

  evaluated and tested relevant internal controls which encompassed
     financial reporting, cash receipts, cash disbursements,
     compliance, and budget;

  tested compliance with significant provisions of the following laws
     and regulations: 

Part B of Title IV of the Higher Education Act of 1965, as amended
(20 U.S.C.  1071-1087-2),

Federal Credit Reform Act of 1990 (Public Law 101-508),

Chief Financial Officers Act of 1990 (Public Law 101-576),

Federal Managers' Financial Integrity Act of 1982 (Public Law
97-255),

34 Code of Federal Regulations, Part 682, and

reviewed Education's compliance with: 

OMB Bulletin 94-01, "Form and Content of Agency Financial
Statements," and

OMB Bulletin 93-18 "Audited Financial Statements."

We did not evaluate all internal controls relevant to operating
objectives as broadly defined by FMFIA, such as those controls
relevant to preparing statistical reports and ensuring efficient
operations.  We limited our work to accounting and other controls
necessary to achieve the objectives outlined in our opinion on
internal controls. 

Except for the limitations on the scope of our work in testing the
liabilities for loan guarantees, our work was done in accordance with
generally accepted government auditing standards and OMB Bulletin
93-06, "Audit Requirements for Federal Financial Statements."

While we examined guaranty agency records in preparation for this
report, we did not focus on Education's use of guaranty agency data
in calculating school default rates.  Hence, this report does not
address the Department's procedures for determination of school
default rates or for considering requests from educational
institutions for recalculation of those default rates.  We have not
examined this process, and therefore express no opinion as to its
efficacy. 

The Department of Education's Under Secretary, Assistant Secretary
for Postsecondary Education, and Chief Financial Officer provided
comments on a draft of this report.  These comments are discussed in
the "Agency Comments and Our Evaluation" section of the opinion
letter and are reprinted in appendix III.  We have also incorporated
agency views where appropriate. 


STATUS OF FISCAL YEAR 1992
FINANCIAL AUDIT RECOMMENDATIONS
========================================================== Appendix II

We determined the status of the following recommendations based on
our audit work at Education during fiscal year 1993 and on our
discussions with Education officials.  However, we have not fully
assessed the appropriateness or effectiveness of all of the responses
identified in the table below. 

                                                                   No specific
                          Action        Action        Action       action
Report/Recommendations    complete      in progress   planned      planned
------------------------  ------------  ------------  -----------  -------------
Financial Audit:
Guaranteed Student Loan
Program's Internal
Controls and Structure
Need Improvement (GAO/
AFMD-93-20, March 16,
1993)


The Congress amend the                                X
Higher Education Act to
require that originating
lenders pay loan
origination fees even if
the loan is subsequently
sold to another lender.

Require that guaranty                   X
agencies and lenders
annually provide
Education an independent
public accountant's
positive attestation on
the claims for payment
submitted to the federal
government, and the
basis for such
attestation, including
an opinion on the
adequacy of internal
controls over such
claims.

Test billings from                      X
guaranty agencies and
lenders as part of its
internal reviews.

Require staff to follow                 X
up on questioned costs
and other amounts owed
based on reviews of
guaranty agencies and
lenders within a
designated period of
time from the time
findings are reported.

Study the feasibility of                                           X\a
requiring guaranty
agencies to standardize
their FFELP loan
accounting systems.

Reassess and, if                        X
appropriate, adjust the
NSLDS implementation
date after completion of
a detailed system
design.

Develop written           X
procedures detailing the
methodology to be used
to derive the financial
statement estimate of
loan guarantee subsidies
and require that each
year's estimate be fully
documented and approved
by the Department's CFO
office.

Establish and maintain                  X
subsidiary ledgers for
the FFELP.

Develop procedures to                   X
ensure that the general
ledger is periodically
reconciled to subsidiary
records maintained by
OPE.

Establish an acceptance   X
testing group
responsible for
independently testing
FFELP application system
changes prior to
implementation.

Implement controls        X
described in the
Department's ADP
Technical Controls
Handbook to ensure that
all data received from
guaranty agencies and
lenders is consistent
and accurate.

Implement procedures to   X
ensure that internal
control reviews and risk
assessments of the FFELP
information systems are
performed periodically
as required by OMB
Circulars A-123,
Internal Control
Systems, A-127,
Financial Management
Systems, and A-130,
Management of Federal
Information Resources.

Enhance the existing      X
computer disaster
recovery plan to include
contingency options at
Education headquarters
and regional offices
regarding key original
documents.

Require that the                        X
security administrator
and appropriate
supporting technical
staff have formal
training in the specific
operating systems and
access control software
used by the FFELP
contractor.

Develop a comprehensive                                            X\a
plan for revising the
role of guaranty
agencies and the manner
in which they are
compensated.

Financial Management:
Education's Student Loan
Program Controls Over
Lenders Need Improvement
(GAO/AIMD-93-33,
September 9, 1993)


Develop a comprehensive                 X
strategy for determining
the accuracy of
information reported on
lender's quarterly
billings.

Monitor and follow up                   X
with lenders whose
quarterly billings fail
to meet Education's
internal automated edit
checks and reasonability
tests

Develop and implement     X
procedures for
converting major
automated systems,
including a requirement
that parallel systems be
run for an appropriate
period of time, to
ensure that new systems
are properly processing
program data.
--------------------------------------------------------------------------------
\a The Federal Direct Student Loan Program, which was established in
1993, will revise the role of guaranty agencies since FFELP is
expected to significantly phase down over the next 5 years. 




(See figure in printed edition.)Appendix III
COMMENTS FROM THE DEPARTMENT OF
EDUCATION
========================================================== Appendix II



(See figure in printed edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV

U.S.  GENERAL ACCOUNTING OFFICE


      ACCOUNTING AND INFORMATION
      MANAGEMENT DIVISION,
      WASHINGTON, D.C. 
------------------------------------------------------ Appendix IV:0.1

Gloria Jarmon, Senior Assistant Director
Louise DiBenedetto, Assistant Director
Rosa Ricks, Audit Manager
Chinero Thomas, Audit Manager
Nilsa Perez, Senior Auditor
HeidiKitt Winter, Senior Auditor
Paolina Pellegrino, Auditor
Christian Stockel, Auditor


      AUDIT ASSISTANCE GROUP
------------------------------------------------------ Appendix IV:0.2

Gloria Hernandez-Saunders, Computer Specialist
Ligia Rodriguez, Auditor


      OFFICE OF THE CHIEF
      SCIENTIST
------------------------------------------------------ Appendix IV:0.3

Judith Bramlage, Assistant Director
Prithviraj Mukherji, Assistant Director


      OFFICE OF THE GENERAL
      COUNSEL
------------------------------------------------------ Appendix IV:0.4

Helen Desaulniers, Attorney

U.S.  DEPARTMENT OF EDUCATION
OFFICE OF THE INSPECTOR GENERAL


      ACCOUNTING AND FINANCIAL
      MANAGEMENT STAFF
------------------------------------------------------ Appendix IV:0.5

Chelton Givens, Director
Jack Rouch, Audit Manager
Gregory Spencer, Audit Manager
Kevin Dugas, Senior Auditor
Louella Lontok, Senior Auditor
Christina Dyson, Auditor
Steven Lachenmyer, Auditor
Catherine Shearin, Auditor


      INFORMATION TECHNOLOGY STAFF
------------------------------------------------------ Appendix IV:0.6

Sue Taeuber, Chief
Patricia Geier, Auditor
Gregory Hayenga, Auditor
Sue Hermitage, Auditor

U.S.  GENERAL ACCOUNTING OFFICE
REGIONAL OFFICES


      ATLANTA
------------------------------------------------------ Appendix IV:0.7

Shawkat Ahmed, Senior Auditor
Deena Devane, Auditor
Thanomsri Piyapongroj, Auditor


      DALLAS
------------------------------------------------------ Appendix IV:0.8

David Irvin, Senior Auditor
Barbara Johnson, Senior Auditor
Jimmy Palmer, Jr., Auditor
Norman Poage, Auditor
Charles Vrabel, Auditor


      KANSAS CITY
------------------------------------------------------ Appendix IV:0.9

Julie Cahalan, Auditor
Doris Hynes, Auditor

RELATED GAO AND OIG REPORTS

Financial Audit:  Guaranteed Student Loan Program's Internal Controls
and Structure Need Improvement (GAO/AFMD-93-20, March 16, 1993)

Financial Audit:  Federal Family Education Loan Program's Financial
Statements for Fiscal Year 1992 (GAO/AIMD-93-04, June 30, 1993)

Financial Management:  Education's Student Loan Program Controls Over
Lenders Need Improvement (GAO/AIMD-93-33, September 9, 1993)

Guaranteed Student Loans (GAO/HR-93-2, December 1992)

Education Issues (GAO/OCG-93-18TR, December 1992)

Student Loans:  Direct Loans Could Save Billions in First 5 Years
With Proper Implementation (GAO/HRD-93-27, November 25, 1992)

Stafford Student Loans:  Prompt Payment of Origination Fees Could
Reduce Costs (GAO/HRD-92-61, July 24, 1992)

Direct Student Loans:  The Department of Education's Implementation
of Direct Lending (GAO/T-HRD-93-26, June 10, 1993)

OPE's Lender and Guarantee Agency Oversight Function Should Focus
More on Audit Follow-Up (ACN 11-20015, December 1, 1992)

Development and Implementation of the National Student Loan Data
System Needs to be Expedited (OIG Semiannual Report-25)

Review of the Performance of the Guaranteed Student Loan Branches
(ACN 04-20075, January 28, 1994)

The Secretary's Default Reduction Initiative:  An Alternative
Approach to Implementing Sanctions (MIR 93-07, September 14, 1993)

Attention Is Needed to Improve the Department's Financial Management
Systems (OIG Semiannual Report-24)

Loan Servicers for the Guaranteed Student Loan Programs Need to be
Better Controlled to Save ED Millions in GSLP Losses (MIR 92-12,
August 19, 1992)

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