Student Loans: Education Should Proactively Manage Fraud Risks in Any Future Debt Relief Efforts

This post first appeared on GAO Reports. Read the original article.

What GAO Found

The Department of Education approved borrowers for its student loan debt relief program without implementing key procedures for preventing fraud. The program would have provided up to $20,000 of debt relief to borrowers who met certain income thresholds if they received a Pell Grant in college, and up to $10,000 if they did not. However, Education ceased work in response to court orders and did not relieve any debt. Education designed its approval processes to prevent ineligible borrowers from receiving relief. However, underlying Education’s efforts was its assessment that the program was at relatively low risk for fraud. Education officials said they prioritized approving eligible borrowers, but Education did not apply key processes to detect and prevent fraud. However, given the large scale of the program—an estimated $430 billion of relief for potentially over 31 million borrowers—leading practices indicate that Education should have proactively addressed risks through effective fraud risk management.

In June 2023, the U.S. Supreme Court held that the debt relief program was not authorized under the HEROES Act of 2003. As a result, Education was not able to implement the program. Education subsequently announced that the department will pursue a new effort to provide borrowers debt relief.

Before ceasing work on the original program, Education developed two processes to assess borrower eligibility, but each process had shortcomings at detecting and preventing fraud. The first process, which affected the majority of borrowers, relied on an application process. The second was an automatic process Education developed for borrowers who had recently reported income information to the department.

Application process. At the time it ceased work on the program, Education had approved an estimated 12 million-plus borrower applicants without evaluating the accuracy and outcomes of its application process. To assess applicants’ incomes, Education used data associated with post-enrollment earnings and aggregate income data to estimate the likelihood that applicants exceeded the income thresholds. Certain applicants were approved, and others were selected for additional review and would have been required to submit tax documentation to verify their income. However, Education had not evaluated the outcomes of its application process for either the applicants it had selected for review or that it had approved. For example, Education had not collected or reviewed any income documentation from selected applicants at the time it ceased work on the program.

In addition, Education did not have procedures in place to evaluate the borrowers it had approved, including whether its approach for approving borrowers was an effective tool for preventing fraud. Education’s documentation recognized the risk of potential errors, and federal internal control standards dictate that agencies should conduct evaluations to determine the effectiveness of their controls. Without evaluative checks in any future efforts, Education will be unable to ensure that its systems are effectively preventing ineligible borrowers from receiving relief.

Automatic Approvals. Education planned to automatically approve over 2 million borrowers for relief based solely on their self-reported income drawn from recent financial aid applications and enrollments in loan repayment plans. Education and GAO have both previously identified problems with people underreporting their income on these forms, but the department did not take any steps to verify incomes for these borrowers before automatically approving them for relief. Federal internal control standards state that managers should take steps to mitigate fraud risks, but Education did not deploy any tools to verify these borrowers’ incomes or ensure they were eligible for relief.

Why GAO Did This Study

Fraud poses a significant threat to the integrity of federal programs and erodes public trust in government. Proactively managing fraud risks can help ensure that taxpayer dollars serve their intended purposes.

Education announced its original student loan debt relief program in August 2022, but little was known about how the department planned to prevent fraud. This report examines the extent to which Education’s policies and procedures mitigated fraud risk in the relief program at the time Education ceased work on it. GAO analyzed documentation of Education’s fraud risk assessments, assumptions, and procedures for verifying borrower income eligibility. GAO also interviewed Education officials with knowledge of the debt relief program and fraud risk management. GAO assessed the department’s efforts against federal internal control standards related to fraud risk management, as well as leading practices in A Framework for Managing Fraud Risks in Federal Programs.

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