NOTE 7 - GUARANTY AGENCY RESERVES RECEIVABLE

	1996	1995
Reserve Funds at September 30	$ 2,686,258	$ 2,365,886
Less: Allowance for Uncollectibles	268,626	236,589
Reserve Funds Receivable, Net	$  2,417,632	$  2,129,297

NOTE 8 - BORROWING FROM U.S. TREASURY

Borrowing from U.S. Treasury consists of funded and unfunded borrowings. Borrowings at September 30, 1996 were (in thousands) $12,718,549 for funded and $814,457 for unfunded. The unfunded borrowings consists of $680,222 for the Emergency Unemployment Compensation Act of 1991 and $134,235 for the Direct Loan Program.

A. The Emergency Unemployment Compensation Act

On September 30, 1992, the FFEL Program borrowed $2.09 billion from the U.S. Treasury in accordance with OMB instructions under the CRA on accounting for noncontractual modifications made to its loan guarantees. The noncontractual modifications were:

• The Emergency Unemployment Compensation Act of 1991 authorized ED to continue collecting on defaulted loans through the Internal Revenue Service (offsetting income tax refunds); such authority had been due to expire in fiscal year 1994. The Act also authorized the use of wage garnishment as a collection tool for defaulted loans.

• The HEA Amendments of 1992 eliminated the statute of limitations on collection activities for certain student loans.

The FFEL Program will repay the borrowing, at an annual interest rate of 7.37 percent, with increased collections on defaulted loans resulting from the noncontractual modifications.During fiscal year ended September 30, the FFEL Program used collections to reduce this Treasury debt as follows (in thousands):

	1996	1995
Beginning Balance Borrowing from U.S. Treasury	$ 1,134,178	$ 1,605,315
Payments to Treasury during Fiscal Year	(   453,956)	(   471,137)
Ending Balance Borrowing from U.S. Treasury	$ 680,222	$ 1,134,178

The aggregate maturities of this debt, based on estimated collections on defaulted loans, for the years subsequent to September 30, 1996, are as follows (in thousands):

B. Borrowing for Credit Programs, Repayments and Write-offs

Funded borrowings, repayments and write-offs at September 30 were as follows (in thousands):

	1996
	Direct Loans	All Other	Total
Borrowings from U.S. Treasury, Balance 9/30/95	$   5,066,722	$ 543,617	$   5,610,339
New Borrowings During Fiscal Year 1996	7,822,923	24	7,822,947
Repayments	(   669,159)	(  45,578)	(   714,737)
Borrowings from U.S. Treasury, Balance 9/30/96	$ 12,220,486	$ 498,063	$ 12,718,549

	1995
	Direct Loans	All Other	Total
Borrowings from U.S. Treasury, Balance 9/30/94	$    433,207	$  573,051	$ 1,006,258
New Borrowings During Fiscal Year 1996	4,868,340	24,156	4,892,496
Repayments	(   234,825)	(    53,357)	(   288,182)
Write-offs	0	( 233)	( 233)
Borrowings from U.S. Treasury, Balance 9/30/94	$ 5,066,722	$ 543,617	$ 5,610,339

C. Interest Revenues and Expense

Interest expense, federal, comprises the interest accrued on borrowings from the Treasury and interest expense recognized to offset interest earned on uninvested funds. The Other category for fiscal year 1996 includes Prompt Payment Act interest expense incurred during the Government shutdown.

Interest revenues and expense during fiscal years ended September 30 are summarized as follows (in thousands):

	1996
	Direct Loans	FFEL	All Other	Total
Interest Revenues, Federal	$ 401,744	$ 513,746	$     509	$   915,999
Interest Expense:
Emergency Unemployment Compensation Act	--	83,589	--	83,589
Subsidy	--	513,746	--	513,746
Borrowings for Credit Programs	884,179	--	34,387	918,566
Total Interest on Loan Programs	884,179	597,335	34,387	1,515,901
Other	27	23	199	249
Total Interest Expense	$ 884,206	$ 597,358	$ 34,586	$ 1,516,150

	1995
	Direct Loans	FFEL	All Other	Total
Interest Revenues, Federal	$ 340,120	$ 506,747	$      977	$    847,844
Interest Expense:
Emergency Unemployment Compensation Act	--	118,314	--	118,314
Subsidy	--	506,747	1,626	508,373
Borrowings for Credit Programs	383,177	--	26,423	409,600
Total Interest on Loan Programs	383,177	625,061	28,049	1,036,287
Other	--	--	45	45
Total Interest Expense	$ 383,177	$ 625,061	$ 28,094	$ 1,036,332

NOTE 9 - SALARIES AND ADMINISTRATIVE EXPENSES

	1996	1995
Salaries and benefits	$ 306,353	$ 299,148
Travel and transportation	9,366	11,916
Rent, communications and utilities	93,884	53,413
Printing and reproduction	21,123	15,717
Materials, supplies and equipment	21,769	21,738
Total salaries and expenses	$ 452,495	$ 401,932

NOTE 10 - COMMITMENTS AND CONTINGENCIES

Perkins Loans Reserve Funds
The Perkins Loan Program is a campus-based program providing financial assistance to eligible postsecondary school students based on financial need. ED provides funds to participating schools to provide about 89 percent of the capital used to make loans to eligible students at 5 percent interest. The other 11 percent of program funding is provided by the institution. For the latest academic year (ended June 30, 1996) there were about 687,000 loans made, totaling about $1,029 million at about 2,381 schools, averaging $1,498 per loan. For the academic year ended June 30, 1995, there were about 664,000 loans made, totaling about $972 million at 2,279 schools averaging $1,464 per loan.

The funding ratio had been 90/10 from the inception of the program through June 30, 1993. Then, for the academic years ended June 30, 1994 and 1995, the ratio for capital contributions was reduced to 85/15 and 75/25, respectively. The funding ratio for the academic year ended June 30, 1996 was also 75/25. The program operates at each school like a revolving fund with loan repayment amounts available to loan to other eligible students. The schools are accountable to the Department for the federal share of their Perkins Loan funds whether held by the school or loaned to participating students. At June 30, 1996 and 1995, the Department's share of the Perkins Loan Program was about $5.7 billion and $5.8 billion, respectively. However, these funds are not reported in the principal statements of the Department because the extent to which they may be recoverable is not known.

Claims-in-Process
In addition to the reported non-entity receivables (see Note 6), about $1.69 and $1.06 billion of non-credit program claims, for which collection probabilities have not yet been established, are being actively pursued at September 30, 1996 and 1995, respectively as claims-in-process. The estimated net realizable value of claims-in-process at September 30, 1996 and 1995, is about $46 and $29 million, respectively. However, much of these amounts consist of claims in various stages in the legal process and the ultimate value cannot currently be determined with reasonable certainty. Therefore, ED will not recognize these amounts in its financial statements until they are received or assured.

Borrower Class Actions
Education is involved in pending litigation challenging the enforceability of FFEL Program loans made to students who attended various trade schools that have closed. In most instances, a large percentage of the loans in question are in default and have been acquired by guaranty agencies and reimbursed by Education. Thus, Education has already incurred losses from payment of defaults. No provision has been made in the principal statements for any potential reductions in estimated future collections related to the outcome of these suits, since Education's potential loss exposure is uncertain and cannot be estimated with sufficient reliability.

Revenues Resulting from Inspector General Activities
The fiscal year 1997 appropriation bill (H.R. 3755) is accompanied by an Appropriations Committee report, dated July 8, 1996, which includes a requirement that the Department disclose information on revenues resulting from the activities of its Inspector General. During fiscal year 1996 the Inspector General recommended and the Department has sustained certain amounts in the categories of questioned costs, unsupported costs and better use of funds. Questioned costs are audit findings indicating that federal funds were misspent by recipients and should be repaid to the Department. Unsupported costs are audit findings that expenditures of federal funds are not supported by documentation required to be maintained by program recipients. Better use of funds are findings that eliminating certain activities and replacing them with others having stronger impact on the Department's mission could improve overall operating efficiency.

For questioned costs and unsupported costs, any amounts recovered through due administrative process are generally credited to miscellaneous receipts and therefore become revenues of the federal government as a whole, rather than of the Department. For better use of funds the recommended operational changes, generally related to internal departmental activities, could result in increased efficiency if implemented and if the conditions found at the time of the Inspector General's recommendation remain unchanged throughout the period of implementation. However, such increased efficiency, when achieved, is not susceptible to quantification with enough precision to be considered as additional budgetary resources. Amounts identified by the Inspector General and sustained within the Department's Office of the Chief Financial Officer (OCFO), Office of Educational Research and Improvement (OERI), Office of Elementary and Secondary Education (OESE), Office of Postsecondary Education (OPE), Office of Special Education and Rehabilitative Services (OSERS) and Office of Vocational and Adult Education (OVAE) are summarized for the year ended September 30, 1996 as follows:

Information on Inspector General Activity Revenue to the Federal Government (in thousands):

Principal Office		Questioned Costs		Unsupported Costs		Better Use of Funds
OCFO		$       82		$         7		$         0
OERI		0		0		0
OESE		43		3		0
OPE		55,787		3,664		4,772
OSERS		555		105		2,200
OVAE		346		0		0
Total		$ 56,813		$ 3,779		$ 6,972

Other Matters
ED is involved in various other claims and legal actions related to its programs, arising in the ordinary course of business. In addition, some portion of current year financial assistance expenses may be found to have funded recipient expenditures which were subsequently disallowed through program review or audit processes. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the principal statements of the Department.

NOTE 11 - SUBSEQUENT EVENTS

College Construction Loan Insurance Association (Connie Lee)
In accordance with of the Student Loan Marketing Association Reorganization Act of 1996, the Department has sold on February 27, 1997 its 1,914.8 shares of Connie Lee stock, with a face value of $19,148,000 with the assistance of the Department of the Treasury. The stock was sold to Connie Lee at a price of $18,382,080 as determined by an independent appraisal. Therefore, there was a loss of $765,920. The proceeds of the sale, less the reasonable selling cost, will be paid to the District of Columbia Financial Responsibility and Management Assistance Authority to finance public elementary and secondary school facility construction and repair in the District of Columbia. Connie Lee will receive an amended corporate charter requiring use of a new corporate name and a complete dissociation from the federal government.

Student Loan Marketing Association (Sallie Mae)
In accordance with the Student Loan Marketing Association Reorganization Act of 1996, the Sallie Mae Board of Directors will carry out a series of reorganization actions that may include creation of a holding company and one or more subsidiary companies and will ultimately result in the dissolution of Sallie Mae by July 1, 2013 and its replacement by a fully private corporation. In the process of conducting these reorganization actions, any proceeds from the exercise of stock warrants and the sale of the right to use the name Sallie Mae as a trademark or service mark will be used to finance public elementary and secondary school facility construction and repair, or to carry out the District of Columbia School Reform Act of 1995.

New Capital Financing Program
ED is establishing a Historically Black Colleges and Universities (HBCU) Capital Financing Program to facilitate construction and renovation of educational facilities by HBCUs. ED serves as guarantor for timely payment of principal and interest on bonds to be issued by a designated bonding authority, a private sector entity appointed by the Secretary. Bonds will be purchased by either private investors or the Federal Financing Bank. Proceeds of the bonds will be used for facilities loans to individual HBCUs. Each participating institution is obligated to deposit 10% of its loan proceeds into a common escrow fund that will be available for bond payments in the event of default by any participating institution. ED is contingently liable for repayment of bonds issued under this program. One loan for $3,500,000 was made as of September 30, 1996.
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[Notes 3 through 6]

[Accountability Report Evaluation Form]