Student Loan Forgiveness is a Hunting Ground for Fraudsters

On August 24, 2022, President Joe Biden announced a plan to cancel federal student loan debt for qualified individuals. The full student loan relief program will include three parts: the targeted forgiveness of existing loans, a tidying up of the student loan system, and continuing efforts at reducing the costs of college and increasing future grants.

Fraudsters follow the money. To combat them, CFEs must be constantly looking ahead and anticipating where and how threats could originate. The focus, then, will primarily rest on the targeted debt relief and the 45 million borrowers holding approximately $1.6 trillion in student loan debt. Current estimates suggest the debt relief could cost the U.S. an average of $30 billion per year over the next decade.

After the last few years of relief programs, fraud examiners are right to worry about the potential for fraud and abuse of any new government spending, especially when it reaches the billions (or trillions). However, it is important to remember that not all government programs are the same. The student debt relief initiative differs dramatically from the Paycheck Protection Program (PPP) and similar COVID related support in its structure and methodology. Anti-fraud protections and fraud examiners’ should tailor their response appropriately.

Student Debt Relief Details:

The announced debt relief plan targets current federal loan holders in low- and middle-income families. The White House estimates that nearly 90% of the debt relief will go to debt holders making less than 75,000 per year. The plan provides for up to $20,000 in debt relief to Pell Grant recipients and up to $10,000 in debt relief to non-Pell Grant recipients. To be eligible, the student loan debt must be held by the Department of Education (ED) and the individual must have less than $125,000 in individual income or $250,000 for households.

Only debt held directly by the ED will be forgiven. If individuals have less debt than they are eligible to have forgiven, the debt is eliminated but no funds are sent to borrowers to “make up” for previous payments.

How does this initiative stack up to other relief programs?

Nearly $5 trillion dollars of relief was provided in recent years to stymie the damage caused by the COVID-19 pandemic. The relief was distributed through several different programs that provided for the people and areas hardest hit by the pandemic. Though it will be a long time before a full retrospective on the relief programs is possible, it is already evident that fraudsters took every advantage and walked away with tremendous quantities of money. The U.S. Department of Justice (DOJ) has ramped up investigation and prosecution of relief fraud and has already identified thousands of alleged fraudsters and over a billion dollars of losses and seizures.

Paycheck Protection Program (PPP)

The PPP was created by the CARES Act in March 2020. The program sought to provide businesses with potentially forgivable loans to continue paying employees. The program was extended over the subsequent years, with a total cost approaching a trillion dollars. As much as $80 billion dollars of the total could have been lost to fraud.

Economic Injury Disaster Loan (EIDL)

This program, headed by the U.S. Small Business Administration (SBA), provided businesses experiencing temporary loss of revenue from COVID with loans to provide for payroll, rent, utilities, operating expenses, and other costs. The maximum loan amount was $2 million per business with payments deferred for the first two years. The SBA announced that it had already provided over $200 billion in emergency funding on February 21, 2021.

Unemployment Relief

The Labor Department estimates that there could have been $163 billion in unemployment related “overpayments,” including “significant” amounts obtained by fraudsters.              

Food Aide Program

The DOJ announced criminal charges against 47 defendants for their alleged role in $250 million worth of fraud against the federally-funded child nutrition program during the pandemic.

Is the student loan forgiveness plan going to have as much fraud as those other programs?

The structure of the payments for COVID relief programs distinguishes how the student loan forgiveness program might compare once it is in full swing.

Under the COVID relief programs, loans were being issued and money sent out to people who applied and met certain qualifications for eligibility. With the student debt relief initiative, the government is instead canceling existing debt already on the government’s books. Borrowers and their applications for relief should match up with data the government already holds. Once approved, the government is simply deleting a portion of existing debt, not sending out a $20,000 check that could go towards a Ferrari or an offshore account. This means that a fraudulent actor cannot create fake businesses or identities, submit applications, and receive money they never intend to pay back. Debt cancellation instead of depositing funds into applicants’ accounts limits the types of possible fraud.

Who is vulnerable and where will fraudsters strike?

The Department of Education, responsible for handling the loan forgiveness program, seems to have an idea of where the vulnerabilities will lie. The Federal Student Aid Office (SAO) has already created and distributed guidance to borrowers on how to avoid getting scammed through their website and emails to potentially eligible borrowers. The scams described by the SAO already existed and have been observed increasing in volume since the announcement of the plan.

The White House weighed in on October 5, 2022, providing a Fact Sheet concerning the current administration’s efforts to protect borrowers from scams resulting from the student debt relief initiative. The Biden-Harris administration’s focus will be on combating scams through additional education for borrowers on how they can protect themselves and by increasing collaboration with states in responding to scam complaints. Other government agencies are also working to protect borrowers and prevent successful scams.

If fraudsters can’t get money sent to them directly from the government, they will instead try to take advantage of the uncertainty and lack of information concerning the program to get money out of the individual borrowers.

Already existing fraud schemes:

Based on the debt relief initiative’s structure, early complaints and evidence, and the government’s own efforts to educate borrowers, the scams should seem familiar to CFEs and those already working in the anti-fraud arena. A few examples to watch out for:

• 1.)Fraudsters will offer to fill out applications for a fee, taking borrowers money and personal information (which they can sell or directly use for identity theft). Borrowers have access to free assistance through various resources and should not pay for debt relief or give away their information. Studentaid.gov provides guidance on seeking assistance with relief applications.
• 2.)Fraudsters will offer to eliminate debt, reduce rates, or provide other incentives to convince borrowers to refinance with their business for illegal fees. These schemes were already present prior to the announcement of this program, but will increase with the lure of promised federal relief.
• 3.)Fraudsters will set up data harvesting websites or apps to steal individuals’ information by masquerading as student loan applications. It will be important for borrowers to only go to known, secure websites. Borrowers should follow common email and internet security protocols, including verifying any links and not providing personal information to unscrupulous actors.

Another pitfall for student debt holders to watch out for is companies taking advantage of the current confusion to convince borrowers to refinance their existing, eligible loans out of the federal system to private lenders. Congresswomen Elizabeth Warren and Ayanna Pressley recently brought attention to this issue in a letter detailing one company’s “grossly misleading guidance” that could ultimately make borrowers ineligible for the upcoming debt relief.

The current landscape on student loan forgiveness is a hunting ground for fraudsters. With the barrage of media coverage, the extremely polarized positions on the program’s existence, and the delay between announcement and program start date, individuals are often left with more questions than answers. Recent lawsuits from several state governments, the corresponding mid-stream adjustments to relief eligibility, and any delays will exacerbate the confusion. It will be vital for fraud fighters to educate borrowers and combat scams targeting them.