DRAFT

January 12, 1999

Honorable William F. Goodling
Chairman
Committee on Education and the Workforce
House of Representatives
Washington, DC 20515-6100

Dear Bill:

Thank you for your December 16, 1998, letter regarding the establishment of a performance-based organization to administer the Department of Education?s student financial aid programs. A copy of this reply is also being sent to the other Members of the Committee who signed your letter.

As you know, before the passage of the Higher Education Amendments of 1998, Student Financial Assistance Programs was a component of the Office of Postsecondary Education (OPE). As a performance-based organization (PBO), it is now separate from OPE and has been renamed the Office of Student Financial Assistance Programs (OSFAP). Before I answer your specific questions, I would like to describe the responsibilities of my office and of each of these offices under this new arrangement.

I will maintain responsibility for the establishment of policy, including student and institutional eligibility. I have asked the Acting Deputy Secretary to oversee the negotiated rulemaking process. The process will be coordinated by the Deputy Secretary?s Chief of Staff, Diane E. Rogers, and Deputy General Counsels Jamienne S. Studley and D. Jean Veta with input from the Offices of the Under Secretary, the General Counsel, Postsecondary Education, Student Financial Assistance Programs, Legislation and Congressional Affairs, and the Inspector General. Staff with essential expertise from OSFAP and other offices will be involved in the regulatory negotiation and development process. These individuals will be closely directed by Ms. Rogers, Ms. Studley, and Ms. Veta, who will ensure that I retain control over the negotiated rulemaking policy decisions and process.

The Office of Postsecondary Education, under the leadership of Assistant Secretary David A. Longanecker, will continue to play an important role in helping develop student aid policy and the postsecondary education budget and legislation, including the recurring activities related to the periodic reauthorization of the Higher Education Act (HEA). OPE will also implement many of the initiatives created by the recent HEA legislation, including GEAR UP, the teacher preparation and recruitment partnerships, the distance learning demonstration projects, and the Learning Anytime Anywhere Partnerships. In addition, OPE will continue to administer the established higher education programs such as TRIO, Title III aid for institutions, international education, and the Fund for the Improvement of Postsecondary Education (FIPSE).

The Office of Student financial Assistance (OSFA) Programs is headed by Chief Operating Officer Greg Woods. Mr. Woods is responsible for transforming OSFAP into a fully-functioning PBO, managing and modernizing the delivery of student aid, and improving accountability and customer service. Mr. Woods is also responsible for implementing and disseminating information about policy changes. As Secretary, I remain responsible for all policy development and decisions. I will request the advice of Mr. Woods regarding the costs and implications of various policy proposals for OSFAP operations and information systems.

Asking the Chief Operating Officer (COO) to oversee the interrelated components of student aid delivery -- including aid applications, aid disbursement, repayment, program management, and oversight -- will provide the flexibility to help OSFAP meet aggressive performance standards. In addition, it is consistent with section 141(b)(2) of the HEA, which assigns the PBO responsibility for "the administrative, accounting, and financial management functions of the delivery system for federal student assistance."

This structure also facilitates the integration of the systems supporting student aid. The HEA legislation charges the PBO with "integrat[ing] the information systems supporting the federal student financial assistance programs." Systems integration is also an important component of the Department?s modernization initiatives, including Project EASI.

To build an integrated system, we must look at the impact of the whole student aid system on our customers and partners. The new COO must be able to coordinate all administrative activities affecting the student aid community. In addition, he should be allowed to consider -- in collaboration with partners -- new ways to streamline and reengineer administrative processes to take full advantage of modern information technology. Finally, the COO should be able to compensate his senior management team, which is running the administrative processes, based upon the same performance objectives that he accepts as COO.

I will now address your specific questions.

1. It is our understanding that the staffing of the PBO is being accomplished by a wholesale transfer into the new organization of the approximately 1,200 employees of the Office of Student financial Assistance (OSFA). Aren?t a significant number of these employees now engaged primarily in legislative, policy, regulatory, or oversight matters? Along with your response, please provide a copy of the most recent staffing plan for the PBO.

OSFAP is not responsible for legislation or policy development. Under my direction, the Office of the Under Secretary oversees policy development and works with the Offices of Postsecondary Education, Legislation and Congressional Affairs, and the General Counsel on legislation and other policy areas related to the student aid programs. The Under Secretary and I
will request the advice of Mr. Woods regarding the costs and implications of various policy proposals on OSFAP operations and information systems.

OSFAP is responsible for implementing broad policies decided upon elsewhere, including implementing regulations and overseeing the participation of schools, guarantors, and lenders in the student aid programs. However, I will oversee OSFAP?s activities in these areas and all final policy decisions about student and school eligibility and guarantor and lender oversight will be mine.

The following table indicates the number of full-time equivalent (FTE) employees now employed in each of OSFAP?s service areas and components. (The responsibilities of each service area and component are described in greater detail in response to your second question.)

We are now implementing the performance-based organization and examining the personnel flexibility provided by the new law. As we move forward in this process, we may reassign OSFAP employees to promote customer service and efficiency.

Service Area	Number of FTE (As of December 1998)
Immediate Office of the Chief Operating Officer*	57
Accounting and Financial Management Service	97
Debt Collection Service	225
Institutional Participation and Oversight Service	379
Guarantor and Lender Oversight Service	50
Policy Training and Analysis Service	205
Program Systems Service	185
Total	1,198

*The total FTE for the Immediate Office of the Chief Operating Officer includes 20 FTE designated to the Direct Loan Task Force, 15 to the Program Management group, four to the Single Identifier Initiative, and eight to Project EASI.

2. Please list the functional offices of the Department that are being transferred into the PBO. For each office, briefly summarize the operational (as opposed to legislative, policy, regulatory, or oversight) function of that office and why you believe it is appropriate for that office to be moved to the PBO.

The Office of Student financial Assistance (OSFA) Programs has been removed from OPE and established as a PBO. It currently consists of six service areas that constitute all aspects of student aid delivery. I described above why this organization of student aid responsibilities will promote efficiency and facilitate systems integration. Indeed, without each of these organizations, the PBO could not meet its responsibilities under the HEA of operating "the administrative, accounting, and financial management functions of the delivery system for federal student assistance."

I will now discuss each of these service areas in greater detail.

The Accounting and Financial Management Service (AFMS) manages financial aspects of the student aid programs, such as receipt, disbursement, accounting, and financial reporting for program funds. AFMS plays an integral role in the "accounting and financial management" activities that the HEA assigns to the PBO. To promote financial integrity, AFMS employees must coordinate closely with the other components of OSFAP.

The Debt Collection Service (DCS) collects Pell grant overpayments and defaulted student loans made under the Title IV student loan programs -- the Direct Loan program, Federal Family Education Loan (FFEL) program, and Perkins Loan program.

DCS plays an important role in the PBO?s accounting and financial management mission. These activities lend themselves to a performance-based approach, could benefit from greater procurement flexibility, and require coordination with other OSFAP offices and systems.

The Institutional Participation and Oversight Service (IPOS) certifies the eligibility of schools to participate in the student aid programs, enforces Title IV requirements for schools, provides customer service to help schools comply with those requirements, and prepares technical information such as default rates. The PBO?s success in performing its responsibilities defined by the HEA, such as financial management and customer service, is substantially dependent upon the work of IPOS. In addition, IPOS is crucial to the PBO?s goal of minimizing student loan defaults.

IPOS?s operations are dependent upon and intertwined with those of the rest of OSFAP. For example, IPOS's new system to assess the relative financial risk of participating schools is dependent on data from all of OSFAP's major delivery systems. IPOS is also dependent on the Postsecondary Education Participants System (PEPS), the database that contains all data on schools' participation in the student aid programs, to resolve default rate appeals and for other activities.

The Guarantor and Lender Oversight Service (GLOS) oversees the participation of guaranty agencies, lenders, secondary markets, and third-party servicers in the FFEL Program. Like IPOS, GLOS?s activities are fundamental to the PBO?s financial management responsibilities and customer service efforts.

The Policy Training and Analysis Service (PTAS) interprets statutory requirements (in consultation with the Office of the General Counsel) that govern OSFAP operations, coordinates activities across programs, and works closely with the Program Systems Service (PSS) to bring any systems changes required by law to PSS?s attention. PTAS also communicates program information to students and families, schools, and business partners, and represents OSFAP at financial aid conferences.

PTAS?s responsibilities cannot be effectively accomplished without extensive coordination with the rest of OSFAP. For example, when developing student aid forms such as the Free Application for Federal Student Aid (FAFSA), PTAS must ensure that the forms comply with program requirements, are developed in consultation with the financial aid community, and meet the needs of the student aid systems. As the organization with primary responsibility for customer service activities, PTAS plays an important role in fulfilling the HEA?s mandate that the PBO "improve service to students and other participants in the student financial assistance programs authorized under Title IV, including making those programs more understandable to students and their parents." Customer service relies on team-based interaction with the rest of OSFAP, is traditionally considered an operational activity, and will represent an important component of the COO?s performance incentives.

The Program Systems Service is responsible for the management of program systems supporting the delivery of Title IV student financial aid. PSS administers nearly $300 million in contracts annually to support the delivery of $48 billion in student aid to eight million students.

PSS is a fundamental component of the student aid delivery system and will significantly benefit from the personnel and procurement flexibility granted the PBO. Several of the goals set for the PBO by the HEA could not be accomplished without PSS, including integrating information systems; implementing an open, common, integrated system for the delivery of student aid; and developing and maintaining a system that contains complete, accurate, and timely data to ensure program integrity. In addition to these six service areas, there are four cross-cutting groups housed in the Office of the Chief Operating Officer. The activities of each of these organizations are integral to the COO?s efforts to manage and modernize the student aid programs:

The Program Management group assists the Chief Operating Officer in managing the student aid programs, oversees a small number of high-priority projects and initiatives, and prepares OSFAP?s budget.

The Direct Loan Task Force coordinates and oversees the activities and management of the Direct Loan program and provides customer service to students and schools.

The Project EASI team staffs the Project EASI initiative, a collaborative effort among government, business, and education leaders to reengineer the financial aid delivery system.

The Title IV Single Identifier Initiative provides each participating school, lender, servicer, and guarantor with a single identifier for all OSFAP programs that can also be used by testing, accrediting, and state agencies and other entities.

3. Pursuant to the Government Performance and Results Act of 1993, the Department is required to submit annual performance plans and later evaluate the extent to which specific performance goals have been achieved. Several objectives established by the Department in its FY 1999 annual plan relate to the delivery of student financial assistance. They are listed under the auspices of the Office of Postsecondary Education. One such goal is to reduce the operating cost of the major student aid computer systems. Another involves benchmarking administrative costs "against other comparable programs, e.g., Sallie Mae."

Unfortunately, baseline standards have yet to be developed for either objective. What role do you anticipate that the PBO will play with respect to setting Results Act objectives and baselines and evaluating the extent to which they are achieved?

I will set the objectives related to the delivery of student financial assistance after consulting with the COO and the Deputy Secretary. Reducing overall program costs will be a top priority for the PBO. These objectives and standards to evaluate progress towards them will be incorporated into the COO?s performance agreement. I will complete the interim performance agreement within the next month; the interim agreement will govern the PBO?s activities for much of its first year.

We are already working to reduce administrative costs by procuring services through performance-based contracts, contracting for services by function rather than by program, reducing the student loan default rate, and increasing collections of student loans.

I hope this information is helpful to you. Establishing the federal government's first PBO requires us to consider many of these issues for the first time. Your perspectives are valuable and welcome. We want to keep you well informed on PBO implementation issues and decisions. Should you require any further information about the specific questions you raised in your letter, please do not hesitate to contact me.

Yours sincerely,

Richard W. Riley