Federal Financial Aid System Hacked by Tax Fraud Scammers

By Joe Messinger, CFP®

April 19, 2017

3 min READ

Have you seen the headlines? The government was making it harder for students to file their federal financial aid applications. In March without warning, the IRS shut down the Data Retrieval Tool with the statement that it was not secure and could be a security risk to personal information on file with the IRS.

Those of us who follow college funding wondered…did they discover a potential breach or were the files actually hacked? (We suspected the later due to the sudden announced shut down of the tool.)

Last week, we got our answer. “Hackers accessed the data of up to 100,000 people…” In testimony before the Senate Finance Committee, the IRS Commissioner outlined the sequence of events. The breach had been discovered in the fall but worries about the breach hit their peak in February and March.

So, what is this Data Retrieval Tool and what is its importance to financial aid? To obtain federal financial aid including federal direct loans, students and their parents file an annual Free Application for Federal Student Aid or FAFSA. The FAFSA is used to evaluate every college student’s financial state and determine which students are eligible for need-based aid.

The FAFSA takes a financial snapshot of a variety of things including the family’s size, income, and assets. This calculation is critical for families as it is used to determine the expected family contribution (EFC) for the upcoming academic school year. Colleges determine if you’re eligible for need based financial aid at their school using this basic formula:

Cost of Attendance (COA) – Expected Family Contribution (EFC) = Need Based Aid Eligibility

When filing the FAFSA, families will use what are called the “prior-prior” federal tax return figures. For example, a student filing in October 2018 will use the tax returns of 2017. Those returns are the most recent on file. Keep in mind however that a high school senior applying in October 2018 is applying for aid that will become effective when they start college in the 2019/2020 school year…hence the prior-prior year terminology.

The FAFSA is filled out online, and most parents and students rely on the Data Retrieval Tool or DRT. As you complete the FAFSA at a certain point in the process, you will be asked if you wish to import your federal tax information directly from the IRS into your FAFSA.

For most parents who aren’t accountants, reading tax returns can be a real nightmare. They are glad to take advantage of a tool which will find your “adjusted gross income”, “untaxed portion of IRA distributions”, “education credits”, “income tax”, and the list goes on for you! (You can refer the chart on the government website for a complete list of items as well as their line number on the 1040, 1040A, or 1040EZ form.)

Relying on parents or students to find the correct line item and fill in the correct amount, leaves the door open to lots of human error. Hence the popularity of the DRT. Now that people will do their own plugging and chugging, we expect to see a decrease in the number of applications completed as well as an increase in the number of accounts flagged for verification, a process where your records will be audited for verification of the numbers you reported.

What were the hackers doing? They were starting a FAFSA submission, using the DRT to import the prior-prior year tax numbers, and using those numbers to submit fraudulent tax filings with the intent of collecting refunds this year.

The IRS is hoping to have the problem fixed by the next year’s filing season which begins October 1, 2017 for the high school graduating senior class of 2018. We sure hope so. In the meantime, students starting college in the fall will need to trudge through the process and carefully review their numbers input into the FAFSA, a cumbersome but necessary task for financial aid and federal student loans. We’ll keep you posted as we learn more.