GAO Finds Signs of Fraud in Income-Driven Repayment Plans

The U.S. Government Accountability Office (GAO) has found signs of potential fraud involving more than 110,000 borrowers who are repaying their federal student loans in income-driven repayment plans. That represents 1.7% of the borrowers studied by the GAO.

These borrowers may have understated their income or overstated their family size to reduce their student loan payments in the income-driven repayment plans.

Benefits of Income-Driven Repayment Plans

Income-driven repayment plans can help student loan borrowers whose student loan debt is high relative to their income.

Income-driven repayment plans cut borrowers a break on their federal student loan payments. The loan payment is based on the borrower’s income, family size and state of residence instead of the amount owed.

If any of those factors change on an annual basis, the loan relief provided by an income-driven repayment plan changes accordingly under the plan’s annual recertification mandate.

If the borrower’s income is low enough, typically less than 150 percent of the poverty line, the monthly student loan payment will be zero.

After 20 or 25 years in an income-driven repayment plan, the remaining debt is forgiven.

(To obtain an income-driven repayment plan, fill out the Income-Driven Repayment Plan Request at StudentLoans.gov.)

Fraud Afoot with Income-Driven Repayment Plans?

Income-driven repayment plans sound like a good deal for struggling borrowers, as many student loan borrowers can attest.

The problem is, income-driven repayment plans are so enticing that the GAO, in a new report entitled Federal Student Loans: Education Needs to Verify Borrowers’ Information for Income-Driven Repayment Plans, states that some borrowers are using fraudulent means to qualify for student loan relief.

According to the GAO:

• Approximately 76,200 federal student loan borrowers who reported zero income (resulting in a zero monthly payment) may earn more than enough income to pay some money toward their loan debt. Understating annual income reduces the annual student loan payment by as much as $1,000 to $1,500 per $10,000 difference in annual income.
• Another 35,200 borrowers have been approved for an income-driven repayment plan after filing applications stating they have family sizes of 9 or more. Two borrowers even claimed to have family sizes of 93. Each additional family member reduces the monthly student loan payment by about $50.

Legislation Stalled in Congress

The GAO notes the federal government has been aware of the fraud issue linked to income-driven repayment plans for a while, but legislation that would help fix the problem has languished in Congress.

In 2018, the U.S. Senate unanimously passed legislation to allow the U.S. Department of Education and the Internal Revenue Service (IRS) to share federal student loan borrower income data so the government could more accurately vet income-driven repayment plan applicants. 

That’s where the bill stopped, as the U.S. House of Representatives never voted on the legislation. Here’s a rundown on the bill, and what its legislative and policy goals were pertaining to income-driven repayment plans:

S.3611 – Sponsored by Sen. Lamar Alexander (Tenn.-R) and introduced on November 13, 2018

This bill requires the Internal Revenue Service (IRS) to disclose certain tax return information to the Department of Education (ED) for the purpose of administering financial aid and loan programs under the Higher Education Act of 1965. (Under current law, students must obtain their own tax return information from the IRS and submit it to ED.)

Upon receiving a request from ED, the IRS must disclose specified tax return information to ED for the purposes of

• establishing, renewing, administering, and conducting analyses and forecasts for estimating costs related to income-contingent or income-based repayment programs;
• the discharge of loans based on a total and permanent disability;
• determining the eligibility for, and the amount of, federal student financial aid; and
• conducting analyses and forecasts for estimating costs related to federal student financial aid programs.

Calling for Renewed Action

In light of the GAO report, the U.S. Department of Education has called for reform.

“The GAO report released today further proves what I’ve long said: there is significant risk in the federal student loan portfolio,” said U.S. Secretary of Education Betsy DeVos, in a July 25, 2019 statement. “For years there have been deliberate efforts to make the maze of student aid more complex for students and less accountable to the American taxpayers who underwrite it. Today’s report is just the latest proof that many of the policy ideas previously pursued were poorly implemented.”

DeVos also said that the reports of fraud from government-backed student loan income-driven repayment plans represent “a significant risk for taxpayers.”

However, without Congressional action, DeVos said the U.S. Department of Education is “unable to partner” with the IRS to independently verify this information. “I am again calling on Congress to provide the Department the authority to independently verify income using IRS 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 when they annually recertify their income with the Department.”

What the GAO Says It Found

The GAO report identifies borrowers with “potential fraud or error” based on income and family size included on income-driven repayment plan applications.

Citing the National Directory of New Hires (NDNH), a federal dataset that contains quarterly wage data for newly hired and existing employees, report states that 95,100 income-driven repayment plans “were held by [76,200] borrowers who reported zero income yet potentially earned enough wages to make monthly student loan payments.”

The GAO notes that a third (34%) of approved income-driven repayment plans went to student loan borrowers who earned $45,000 or more on an annual basis. That figure includes some borrowers who earned $100,000 or more in annual wages. Among these borrowers, over $4 billion is owed in federal student loan debt as of September 2017.

The GAO report also stated that approximately 40,900 income-driven repayment plans “were approved based on family sizes of nine or more, which were atypical for IDR plans.”

Of that figure, about 1,200 income-driven repayment plan recipients won approval from the federal government after they said had family sizes of 16 or more. The GAO states borrowers with a family size of 9 or more owed $2.1 billion in Federal Direct Loans, as of September 2017.

All told, 29.5% of borrowers and 49.5% of loan dollars in the Direct Loan program are in income-driven repayment plans, based on repayment plan data as of December 31, 2018.

Weak Vetting Capabilities

The GAO also reports that the U.S. Department of Education doesn’t have the proper tools to accurately vet income-driven repayment plan applicants.

Citing “weaknesses” in the department’s application approval process, the report states that “while borrowers applying for IDR plans must provide proof of taxable income, such as tax returns or pay stubs, the Department of Education generally accepts borrower reports of zero income and borrower reports of family size without verifying the information.”

Sharing data with the IRS would be a great way for U.S. Department of Education staffers to check the accuracy of applications. The U.S. Department of Education does have other vetting options it should put in place, the GAO states.

“Although Education does not currently have access to federal sources of data to verify borrower reports of zero income, the department could pursue such access or obtain private data sources for this purpose,” the GAO reports.

The U.S. Department of Education also “has not systematically implemented other data analytic practices,” like applicant data it already has that has been accurately vetted. This could reduce loan losses and protect the taxpayer’s investment in federal student loans.

Extra Steps to Take

The GAO also advises implementing the following procedures to week out fraud and inaccuracies in income-driven repayment plan applications:

• Obtain data to verify income information for borrowers who report zero income on income-driven repayment plan applications
• Implement data analytic practices and follow-up procedures to verify borrower reports of zero income
• Implement data analytic practices and follow-up procedures to verify borrowers’ family size.