9: Student Aid Fraud and Errors (ED)

Elimination of Fraud and Error in Student Aid Programs and Deficiencies in Financial Management, Department of Education (ED)

Other Information:

THE PROBLEM • Federal student aid programs help nearly nine million students afford college each year. Better management of these programs is necessary to maximize the advantages provided to these recipients and protect taxpayer dollars from being wasted. • Through the Department of Education (ED), the federal government supports approximately $60 billion in student financial aid annually, in loans, loan guarantees, grants, and work-study opportunities. ED manages the delivery of student aid benefits to students in approximately 5,300 postsecondary schools, and oversees the direct and guaranteed loan systems affecting 37 million individuals, 4,100 lenders, and 36 guarantee agencies. • Financial statement audits during the past five years have exposed numerous management problems at ED, including an unreliable financial management system and inadequate technology security. Since its first audit in 1995, ED has received only one unqualified, or "clean," opinion on its financial statements. • Because of these deficiencies, the General Accounting Office (GAO) has, since 1990, classified the student financial assistance programs at ED among the federal programs at highest risk of fraud, waste, error, and mismanagement. In its most recent report, GAO noted that the Department lacks the financial and management information needed to manage these programs effectively and the internal controls needed to maintain the integrity of their operations. GAO also has cited ED’s inability to verify students’ income effectively as a weakness in the student aid programs that leaves them vulnerable to fraud and error. Students are awarded Pell Grants and loans based on the financial resources they report on their aid applications. ED currently verifies the income information on applications by asking 30 percent of applicants to provide copies of their tax returns to their schools’ financial aid offices. This process is vulnerable to fraud and error be-cause students can easily change their returns or claim they did not file. The process is also burdensome to students and schools and raises privacy issues by giving school officials access to complete tax returns belonging to students and their parents. — A test match between ED and Treasury compared the income students reported on their aid applications to IRS income data. Preliminary results of that test estimate that the Pell Grant program made overawards of up to $400 million in 2000–2001 (and underawards of over $100 million) because students or their parents misreported their income on their student aid applications. The Administration does not expect that 100 percent of the benefits of an income verification program could be achieved when the program is first implemented, but past experience indicates that immediate benefits could be substantial and additional benefits would accrue over time. THE EXPECTED RESULTS • Erroneous payments to students will be reduced, ensuring that aid is targeted to the neediest students and increasing public confidence in the programs’ integrity. • The student aid programs will be removed from GAO’s "high risk" list by 2002, reflecting financial management and program improvements that significantly reduce their vulnerability to waste, fraud, abuse, and mismanagement. • ED will receive an unqualified opinion on its financial statements, indicating a robust and reliable financial management system that will enable ED to produce accurate financial and management information. This data can be used to improve daily oversight of operations, better measure program performance, and inform policy decisions.

Objective(s):

9.1: Unqualified Audit

9.2: MIT, Issue Resolution, and Financial Management System

9.3: Income verification, security, and privacy

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