Feds May Crack Down on Student Loan Fraud
This here is why we can’t have nice things.
At least two of ‘y’all tried to reduce your monthly student loan payments by reporting a household size of 93. And the federal General Accounting Office is calling BS.
That’s one of the more egregious findings from a recent GAO report. The gist: Thousands of student loan borrowers are likely defrauding the government by lying about their incomes, household sizes, or both.
As a result, borrowers can soon expect much tighter scrutiny of these income-driven repayment plans and self-reported income and family size information.
“The GAO report released today further proves what I’ve long said: there is significant risk in the federal student loan portfolio,” said Secretary of Education Betsy DeVos in a 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.” She continued, “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. We didn’t create that problem, but rest assured we will fix it.”
Crime and Punishment – Student Loan Fraud
Deliberately misrepresenting income or family size in order to defraud the U.S. government is a federal crime. Secretary DeVos vowed her agency will conduct a thorough review and will refer cases of fraud to the Justice Department for prosecution. If caught, these individuals would potentially face the following charges:
- False claims (18 U.S. Code Section 287), punishable with up to five years imprisonment,
- Conspiracy to defraud the United States. (18 U.S. Code Section 371), also punishable by up to five years imprisonment,
- Making false or misleading statements (18 U.S. Code Section 1001), also punishable by up to five years imprisonment, and/or;
- Mail or wire fraud (18 Code Section 1341) (punishable by up to 20 years imprisonment).
How Student Loan Fraud Works
People who borrow federally subsidized or guaranteed student loans can generally sign up for one of several available inc0me-based repayment plans. Depending on the plan type, these plans cap borrowers’ monthly payments at 10 to 20 percent of their available discretionary income. This is their gross after-tax income – over and above an amount equal to roughly 150% of the federal poverty line defined for a family of their size in that geographical area.
Here are the guidelines as of 2019 for the 48 contiguous states:
Alaska and Hawaii have separate guidelines you can access here.
So if you’ve signed on to REPAYE, you have an annual income of $35,000, and a two-person household, you would have to pay a maximum of $70.46 per month.
That’s $35,000 – [($16,910 x 1.5) x 0.10] / 12 monthly payments.
However, if you earn less than the federal discretionary income threshold of 150% of the poverty guideline for your family size and state, then your payment is set at zero. But your zero payments are credited toward eventual student loan forgiveness – either after 10 years (for Public Service Loan Forgiveness, or PSLF), or after 25 years for those who don’t qualify for PSLF.
According to the GAO, nearly half of the $859 billion in outstanding federal Direct Loans is being paid back under the terms of the several income-driven repayment (IDR) plans.
There’s nothing wrong with making zero payments: It’s completely legal – as long as you don’t have to lie about your income or your household size to qualify.
But if you DO lie about your income, deliberately conceal taxable income or claim deductions you are not entitled to, or if you lie about your household size and dependents to get a lower payment on your student loans – it’s student loan fraud.
Student Loan Fraud and Income Underreporting
The GAO estimates that there were about 95,100 separate IDR plans held by borrowers who reported zero discretionary income – and therefore a zero payment – but who potentially actually earned enough wages that they should have been making at least some payment. These borrowers may be accidentally or deliberately underreporting their income to their student loan services, or they may be inflating their household sizes by falsely claiming dependents or both.
The GAO estimates that borrowers in these 95,100 IDR plans owe nearly $4 billion in total Direct Loan balances as of September 2017. About 34% of them likely have incomes of $45,000 or greater – which would require at least some monthly student loan contribution except for those in very large families. The GAO also found about 3,300 cases of borrowers claiming they had no income, despite federal data suggesting they had incomes of at least $100,000.
All told, the GAO estimates that about 11% of zero-payment IDR plans are associated with 76,200 unique borrowers who really earn enough to make at least some contribution and who have been underreporting their income to student loan servicers.
The GAO also found about 3,300 cases of borrowers claiming they had no income despite federal data suggesting they had incomes of at least $100,000. There were two separate borrowers who claimed to have 93 relatives in their households. Each of them was approved for lower loan payments under an income-driven repayment plan.
Nearly 15,000 households claiming nine or more members owed almost $2.1 billion in outstanding Direct Loans as of September 2017. About 1,200 of them were approved lower payments based on household sizes of 16 or more.
The GAO made several recommendations, with which the Department of Education broadly concurred:
1.) The Department of Education should verify self-reported income information for all borrowers who report zero income on IDR plan applications by comparing it with other data sources.
2.) The Department should implement data analytic practices and follow-up procedures to verify borrower reports of zero income and family size.
We expect the Department of Education will be taking steps to tighten up the process – especially with households claiming to qualify for a zero payment, and who report exceptionally large family sizes.
Ideally, the Department of Education would be able to crosscheck self-reported earnings data against IRS data to identify mismatches. For example, if a borrower is claiming to have a $24,000 per year income and 12 exemptions on his or her student loan paperwork, but the borrower is receiving W-2s and 1099s amounting to a gross income of $100,000, that could raise a red flag for investigators.
However, at present, the Department is prohibited by law from accessing individually identifiable IRS records for this purpose. Secretary DeVos is calling for Congressional action to allow this.
“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,” said the Secretary.
Meanwhile, borrowers should take a conservative approach to claiming income and family size. Don’t claim income that is less than what will show on your tax return for the year, and don’t claim a family size that is larger than what you can justify based on your household dependency filings.
How to (legally) reduce your income for student loan repayment calculations
While you should never lie to your student loan servicer or the government about your income, and you should never attempt to conceal taxable income from the government, there are some legal and completely legitimate ways you can reduce your taxable income in order to qualify for a lower income-based repayment:
1.) Take these “above-the-line” deductions.
An “above-the-line deduction is one you can claim on your tax return even if you don’t itemize your deductions, and instead take the standard deduction. These deductions can benefit all taxpayers, and not just the ones who have incomes and expenses high enough to itemize on a Schedule A.
- Deductible traditional IRA contributions (Roth IRAs don’t qualify for a current-year deduction). For 2009, individuals can reduce their taxable income by up to $6,000. If you’re age 50 or older, you can contribute an additional $1,000.
- Spousal IRA contributions (up to $6,000, plus $1,000 if your spouse is age 50 or older, if you qualify. You can contribute even if your spouse is not in the workforce).
- Health savings account (HSA) contributions
- Student loan interest deductions.
- Educator expense deductions.
- Deductions for self-employment.
- Alimony deduction. Alimony payments you make are deductible for you (and taxable to your ex).
- Moving expenses for military members.
2.) Contribute as much as you can to your employer’s retirement plan.
- 401(k)s and 403(b)s
- SIMPLE IRAs
3.) Set up and contribute to a small-business retirement plan.
If you have self-employment income or income from a small business or even a side hustle, you may be able to set up your own small business retirement plan, such as a Simplified Employee Pension plan (SEP) or Solo 401(k) plan.
Each of these plans potentially allows you to set aside a significant amount of income for retirement, while simultaneously sheltering it from taxes and reducing your expected student loan repayment if you are on an income-driven repayment plan.
Depending on your situation, taking advantage of these deductions may also help preserve your family’s ability to qualify for other tax credits and deductions, food stamps, Medicaid and even need-based financial aid for other family members going to college.
For information and tax planning advice specific to your situation, consult a licensed tax professional.
Jason Van Steenwyk is an experienced financial industry reporter and writer. He is a former staff reporter for Mutual Funds, and has been published in SeekingAlpha, Nasdaq.com, NerdWallet, Value Penguin, RealEstate.com, WealthManagement.com, Senior Market Advisor, Life and Health Pro and many other outlets over the past two decades. He is also an avid fiddle player and guitarist. He lives in Orlando, Florida.