A Financial Aid Retrieval Error

Antwan Williams, a senior at Roosevelt High School, fills out a college enrollment application at his school in Washington on November 14, 2013.

Late last week, the Internal Revenue Service, or IRS, and the U.S. Department of Education announced they had disabled a key web-based tool that helps millions of students. By suddenly shutting down this critical resource, these agencies have created a wave of disruption for students, families, and institutions across the country.

The disabled system is the IRS Data Retrieval Tool. Created in 2010 by the Obama administration, the online tool eases the burden of applying for federal financial aid. Instead of having to locate copies of tax returns and manually enter detailed information, students and families can automatically transfer their tax information onto their financial aid application. Not only does this speed up the application process, it also reduces the risk of errors. This modernization of an old, paper-based system was quintessential good government—two agencies working behind the scenes to make things easier for students.

But now, the IRS tool has been turned off.

At some point in the past few weeks, the department and IRS took the tool offline with no advance warning.

When students now attempt to access the site they receive this error message: “This service will be unavailable due to system maintenance. We apologize for any inconvenience.” Days after the error message first appeared, the agencies issued a vague statement saying that the tool had to be taken down for security purposes. A week later The Wall Street Journal reported that there were “criminal activity” issues with the tool, but provided no further information on the extent of these problems. Students and families, meanwhile, were told to enter the information manually by locating paper or electronic copies of their tax returns.

Shutting down this vital resource simply makes the process more bureaucratic. Most importantly, it puts millions of students at risk of missing out on generous grant programs; it could mean that large numbers of borrowers will see their loan balances balloon. It is unclear whether these concerns about the harm to students from taking the tool down were ever balanced against whatever worrisome activity took place.

Not only was a decision with grave consequences communicated poorly, it could have been entirely avoided by some straightforward, privacy-minded tweaks. More broadly, though, this change also highlights just how much further we need to go on simplifying the federal aid system.

This is not an arcane website issue. The government’s decision will harm students, borrowers, and institutions.

Aid applicants risk losing access to grant aid

Any step that makes it more difficult to apply for financial aid has the potential to discourage low-income applicants from getting the benefits they need from the federal government. But the most urgent worry is at the state level.

Many state financial aid programs use the Free Application for Federal Student Aid, or FAFSA, to determine eligibility for their own dollars. State financial aid programs, however, are rarely entitlements. Many states establish priority deadlines, and those who miss that deadline have no guarantee they’ll get any state aid—even if they qualify. For example, students hoping to get up to $3,000 from Maryland’s Howard P. Rawlings Educational Assistance Grant had to submit an application by March 1.

In fact, nine states have priority aid deadlines after the tool went down in March and April, including Texas, according to one website that studies financial aid. These states awarded $2.4 billion in aid in the 2014-15 school year, 20 percent of the national total. (This includes all grant aid in a state, not all of which requires these deadlines.) The state of Texas  gave its public colleges the opportunity to move back their aid deadlines, while Indiana extended its deadline by more than a month.

In other words, the timing of the website outage couldn’t be worse. Many students completing a last-minute application for state aid won’t have enough time to find a copy of their tax return— and they’ll be shut out.

Borrowers could see their payments jump

Some 5.9 million student loan borrowers also face potential peril thanks to the decision to shut down the IRS tool. These borrowers are using one of the income-driven repayment programs, which allows them to peg their payments to what they earn. These individuals also rely upon the data retrieval tool, because they are required to submit updates on their income each year.

If borrowers fail to update their income information they face significant consequences. Any interest that accrued while they were on the income-driven payment plan capitalizes. Instead of a lower payment, they get hit with what they would have paid on the 10-year standard plan. Loan servicers also have to expend resources tracking down borrowers to do their paperwork—resources that could be better used to help delinquent borrowers.

This annual paperwork requirement for borrowers on income-driven repayment plans is already a major challenge. The Department of Education estimates 60 percent will miss the deadline. Taking away the data retrieval tool will likely make this problem worse by forcing borrowers to mail or fax information they could previously handle with a few clicks.

Aid offices face new headaches

An underappreciated benefit of the data retrieval tool is that it reduces red tape for colleges. One action colleges are required to do is verify whether information students provide on their application is accurate for a subset of their applicants. The data retrieval tool makes that process much easier and also reduces the likelihood that financial aid gets awarded incorrectly—an issue that can later cause all kinds of problems for institutions during Department of Education program reviews.

Without the data retrieval tool, financial aid offices will likely have to engage in many more verification processes. That will take time and effort away from helping students succeed in college by explaining aid packages, counseling on borrowing, or dealing with financial aid appeals.

An avoidable disaster

The IRS and the Department of Education left the public in the dark about the nature of the criminal activity that led them to take this drastic action. A few clues might shed some light on it, though.

Users can’t access the tool at all unless they already have the type of information typically sought in identity theft, such as a name and Social Security number. The vulnerable information presumably is not something that the user inputs, but rather something that the tool spits back at them.

What’s unfortunate is that if thieves were in fact using some data provided back by the IRS tool then there were better solutions for how to address the problem. Why not mask the data that’s transferred from the retrieval tool to the Department of Education? The person using the tool does not need to actually write down the numbers displayed on the screen; there’s a button to automatically import it. By ensuring the individual sees every piece of data on the tool, the IRS introduces the opportunity for fraud. One also has to wonder whether the IRS would have been better able to prevent this problem had its budget not been decimated over the past several years.

More broadly, this security concern could be eliminated entirely through sensible federal aid application reforms. For starters, why even require families to go through this whole process? The aid application could be changed to only ask questions about data already held on tax returns plus some questions that do not involve private information, like the number of family members in college at once. Then all families would have to do to apply is authorize the IRS to transfer their information to the Department of Education. This system could even be improved further to allow families to sign up just once to have their tax information sent every year.

Regardless of implementing additional reforms and modernizations down the road, the IRS and the Department of Education must take swift action to get this critical tool back up and running. Too many students, families, and borrowers depend on it.

Ben Miller is the Senior Director for Postsecondary Education at American Progress.