Feds find potential fraud in student loan repayment plans

Tens of thousands of federal student loan borrowers may be getting their monthly payments lowered by lying about their income and family size, yet the U.S. Education Department is doing little to catch them, according to a report released Thursday by a federal watchdog agency.

Among the most extreme cases reported by the Government Accountability Office are two separate borrowers who claimed to have 93 relatives in their households, along with 3,300 cases in which borrowers said they had no income even though federal data suggest they made $100,000 a year or more. All were approved for lower loan payments.

Investigators were reviewing the Education Department’s oversight of its popular income-driven repayment plans, which allow borrowers to pay lower monthly rates based on their incomes and family sizes. After 25 years of payments, all remaining debt is wiped clean.

Education Secretary Betsy DeVos said her agency will conduct comprehensive review of the repayment plans and will refer cases of fraud to the Justice Department for prosecution. She placed blame on previous administrations, saying the problems are proof that “many of the policy ideas previously pursued were poorly implemented.”

“Misrepresenting income or family size is wrong, and we must have a system in place to ensure that dishonest people do not get away with it,” DeVos said. “We didn’t create that problem, but rest assured we will fix it.”

The federal watchdog agency says it identified 95,100 cases in which borrowers were approved as having no income even though it appears they were earning money. Using wage data from the Department of Health and Human Services, investigators found that borrowers in a third of those cases may actually have been making $45,000 a year or more, including some who topped $100,000.

They concluded that the department “does not have procedures to verify borrower reports of zero income, nor, for the most part, procedures to verify borrower reports of family size.” Borrowers applying for the repayment plans can check a box indicating they have no income, and the department generally takes them at their word with no further documentation needed, the investigation found.

If approved, borrowers with no income typically are not required to make monthly payments.

The review also found 40,900 approved plans in which borrowers said they had family sizes of nine or more, which investigators said were “atypical” and amounted to statistical outliers. About 1,200 of those cases involved borrowers who said they had families of 16 or more. The department also does not require borrowers to provide documentation proving their self-reported family sizes.

The number of cases in which borrowers appear to have falsely claimed zero income amounts to 11% of plans investigators analyzed. Cases with unusual family sizes amounted to about 1% of plans reviewed. The amount of debt in all those cases combines to more than $6 billion.

The report warned that the Education Department could be losing thousands of dollars for every borrower who provides false information, but it didn’t put an exact number on the potential loss. Federal payment plans based on income have surged in popularity in recent years and accounted for $414 billion in student debt last September.

Investigators acknowledged that their review doesn’t necessarily prove fraud, but they emphasized that borrowers “may have a financial incentive to commit fraud to reduce their monthly payment amount.”

“The weaknesses we identified raise questions about the strength of Education’s institutional oversight of a major program involving hundreds of billions of dollars,” the report said.

Education Department officials said they’re crafting new processes to verify income and family size, but they noted that the agency doesn’t have access to federal income data that could be used to verify borrowers’ earnings. DeVos said Congress should authorize her department to access that data.

“If Congress provides the department with this authority, we could significantly reduce the risk of fraud and improper payments, save taxpayers money and reduce the burden on borrowers,” DeVos said.

A bill approved in the Senate last year would have automatically sent borrowers’ tax information to the Education Department, but the proposal didn’t make it to a vote in the House. Sen. Lamar Alexander, R-Tenn., who co-sponsored the bill and chairs the Senate’s Senate Health, Education, Labor and Pensions Committee, called on his colleagues to take up the proposal again.

“The Senate should pass again this year the bipartisan legislation that would prevent fraud and errors and make it easier for borrowers to repay their loans,” he said.

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