year's Higher Education Act reauthorization and other recently
introduced legislation provide Congress and the Bush Administration
with an excellent opportunity to cut waste and fraud in the U.S.
Department of Education's Pell Grant program. By changing how
financial information is verified, Congress could save between $300
million and $600 million per year at a time when the Pell Grant
program is becoming increasingly expensive to operate.
Curtailing waste and fraud is of special
importance to the 108th Congress, as the 2004 Congressional Budget
Resolution mandates that each congressional committee cut 1 percent
of its discretionary budget items by eliminating waste. One proposal--the
Student Aid Streamlined Disclosure Act of 2003 (H.R. 3613),
introduced by Representative Sam Johnson (R-TX)--would accomplish
this by using data sharing to reduce fraud and waste in the Pell
Reducing fraud and waste in the Pell grant
program would yield substantial budgetary savings:
A recent U.S. General Accounting Office (GAO) report
found that fraud accounted for more than $600 million in Pell
Grants from fiscal year (FY) 2001 to FY 2002, or just over 3
percent of the program dollars per year.2 Eliminating this fraud
would free roughly $300 million per year for grants to low-income
college students--enough money to fund $4,000 Pell Grants to 75,000
needy students who might otherwise be turned away.
The Office of Management and Budget estimates that if the
Internal Revenue Service (IRS) and the Department of Education
shared and verified income information of student aid applicants,
total savings (both in terms of fraud and in terms of program
administration) might be as high as $638 million per year.
What Is the Pell Grant Program?
Pell Grant program is the largest federal aid program for
postsecondary students, with a budget of nearly $11.4 billion for
FY 2003 (representing almost half of all federal postsecondary aid
administered by the Department of Education). Pell Grants are awarded to
undergraduate students according to a need-based formula
established by Congress, which uses the student's and (usually)
the parents' incomes and assets to gauge eligibility.
apply, students must fill out a Free Application for Federal
Student Aid (FAFSA), which asks for income and asset information.
From this information, the Department of Education calculates the
expected family contribution (EFC) toward the student's college
expenses, which is a portion of family income and assets. The
poorest undergraduate students have an EFC of $0, which generally
qualifies them for the maximum Pell Grant of $4,050 for the
2003-2004 academic year. Smaller Pell Grant awards are made until
the EFC rises above $3,850, at which point a student is
verification measure, about 30 percent of students who apply for
federal student aid each year are required to provide tax returns
or other documents to their school to substantiate the income
reported on their FAFSA form. If there is a large discrepancy between
tax documents and the FAFSA (generally over $400), the FAFSA
information is corrected to match the tax return and the EFC is
recalculated. Students who refuse to provide tax documents are
denied federal student aid.
The Extent of Pell Grant Fraud
There are two basic problems with the
existing system. First, there is a fairly high incentive to cheat
the system. At the same time, students can misrepresent their
income (or their parents' income) on the FAFSA with only a small
chance of discovery. The Department of Justice and the Department
of Education's Office of the Inspector General are understandably
far more likely to pursue and prosecute large cases of student aid
abuse rather than individual ones.
March 2001, for example, the Inspector General's office charged 18
parents and eight financial aid advisers with fraudulently
obtaining $2.6 million in student grants and loans. More than half of the
alleged fraud (about $1.4 million) centered on a single financial
aid consultant. Many of the indicted parents continued to file
accurate tax returns to the IRS while reporting lower incomes to
the Department of Education. Many other such large-scale cases have
been filed over the past few years.
second problem is verification. Even if the student is one of the
30 percent who must verify income, these tax returns come directly
from the student, not the IRS, so the actual documents could easily
be altered or made up out of whole cloth. In the fraud case cited above, the
financial adviser allegedly manufactured false tax returns in the
event that one or more of the applications submitted were chosen
Although large-amount cases such as this
one attract significant attention from federal prosecutors and the
media, individual student small-dollar fraud/overpayments have not
been adequately quantified until recently. In July 2003, the GAO
reported the results of a Department of Education statistical
project designed to estimate how many dollars in Pell Grants are
awarded to ineligible students. It found that the Department of
Education had made $602 million in Pell Grant overpayments between
FY 2001 and FY 2002 ($272 million in FY 2001 and $330 million in FY
2002), representing about 3.3 percent of the program funds
allocated for grants. Curtailing this fraud would effectively
increase the amount of money available for needy college students
by roughly $300 million per year--enough to fund $4,000 Pell Grants
to 75,000 needy students.
According to the Office of Management and
Budget, data sharing to reduce fraud and administrative costs could
save $638 million per year. The Congressional Budget Office
estimates potential savings of $2.4 billion over 10 years, or $240
million per year,
and the House Committee on Education and the Workforce estimates
potential savings of $340 million. Total savings from data sharing, from
both reduced fraud and reduced administrative waste, could
reasonably be expected fall in the range of $300 million to $600
million per year.
Possible Solutions for Curbing Fraud
Bush Administration, the GAO, and other agencies have suggested
that data sharing between the Department of Education and the IRS
could curb Pell Grant and other student aid abuse, saving
taxpayers' money in the process. In November 2003, Representative
Johnson introduced the Student Aid Streamlined Disclosure Act of
2003 (H.R. 3613), which would amend Section 6103 of the Internal
Revenue Code of 1986, authorizing the IRS to share limited taxpayer
information with the Department of Education for the narrow purpose
of verifying student eligibility for financial aid.
data sharing could work in one of two ways. Under the first option,
a student (and his or her parents) would sign a release authorizing
the IRS to release the tax information to the Department of
Education. The student would then not have to provide the tax
return information; instead, the IRS would automatically forward
the information to the Department of Education, thus lessening the
applicant's burden while also reducing administrative costs.
drawback is that under the current system, a student can apply for
student aid as early as the January prior to the academic year for
which aid is sought. The IRS typically will not process the returns
and have them ready until months later. (Indeed, by early January,
few families would have the W-2s and other documents needed to
begin assembling their returns). This option would unduly delay
grant payments to the individual students and colleges.
second alternative, which H.R. 3613 favors, would still require the
student's family to submit the same tax information, but the
information would be verified later in the year. Since Pell Grants
typically are disbursed in two payments--for the fall and spring
semesters--verification could probably be completed before the
spring disbursement. If a student provided faulty information to
the Department of Education, it would likely be caught during this
audit period, and the federal government could reduce or eliminate
the spring grant payment as needed. In the case of fraudulently
obtained grants, the Department of Education could more easily
extract repayment or levy civil or criminal penalties, if
Higher Education Act of 1998 provided for such increased data
sharing, but this could not be fully realized because the Internal
Revenue Code was not also amended to allow data sharing. H.R. 3613 would amend
Section 6103 of the Internal Revenue Code to allow such data
sharing between the IRS and the Department of Education. However,
even if H.R. 3613 were enacted, next year's reauthorization of the
Higher Education Act would still need a provision continuing this
kind of data sharing.
Opponents of this kind of data sharing
have raised privacy concerns that, generally speaking, center on
the government's ability to keep private data, such as tax
information, confidential. As the argument contends, opening up IRS
data to other agencies increases the chances that confidential tax
data will be released to unauthorized individuals.
IRS already shares tax data on a limited basis with the Department
of Education, which appears to have a good track record in
maintaining confidentiality. The Income Contingent Repayment (ICR)
plan, one of the federal Direct Student Loan repayment options,
already uses data from the IRS to calculate monthly loan
program allows individuals to pay a percentage of their income
toward their student loan debt. In most cases, this amount is far
less than a traditional 10-year student loan repayment schedule,
which especially benefits recent graduates whose incomes remain
fairly low. To participate, students must allow the IRS to share
their income information with the Department of Education. About
100,000 new individuals sign up to participate each year.
About a year ago, a small-scale pilot
program of less than 150 applicants selected into the verification
program asked the applicants (and their parents) to allow the IRS
to release their tax information directly to the Department of
Education. This project was intended to increase the speed and
efficiency of the verification process by taking the aid recipient
and his or her family out of the process, allowing the Department
of Education to receive information directly from the IRS.
According to the GAO, initial feedback from students, parents, and
the Department of Education was very positive.
Broadening this data sharing to include
all federal student aid recipients is a reasonable next step. It
would reduce the burden on the 30 percent of aid applicants who are
currently selected for verification. This alone would save
substantial time and money by reducing fraud, limiting the
applicants' burden, and streamlining administrative costs.
Finally, and perhaps most important,
restricting data sharing to the narrow purpose of verifying
information that student aid applicants provide should ease privacy
concerns because the only data the IRS would be sharing with the
Department of Education are data that the department already
receives directly from applicants under current law.
What Congress Should Do
sharing is a viable way to rid the Pell Grant and other student aid
programs of waste and abuse. The General Accounting Office, the
House Education and the Workforce Committee, and the Office of
Management and Budget estimate that data sharing between the IRS
and the Department of Education could realize savings of roughly
$300 million per year in reduced fraud and total savings of as much
as $638 million per year. To achieve this, Congress should:
- Maintain the provision in the 1998
reauthorization of the Higher Education Act that allows increased
data sharing between the IRS and the Department of Education.
Section 6103 of the Internal Revenue Code to allow data sharing
between the IRS and the Department of Education for the narrow
purpose of verifying postsecondary student eligibility for federal
- Continue to penalize students who
grossly misrepresent their resources in order to secure higher
amounts of federal student aid, forcing repayment and assessing
fines as warranted.
These simple measures are an easy way for
Congress to reduce fraud, increase the funding available to
low-income students, and streamline a large part of America's
postsecondary student aid system.
Kirk A. Johnson,
Ph.D., is Harry and Jeanette Weinberg Fellow in
Statistical Welfare Research in the Center for Data Analysis at The