What Happens If You Misuse Federal Funds?

The federal government provides Americans with a variety of loans and grants for many types of purposes. Some common types of federal funding include student loans, business grants and funding, or financial aid after a crisis or natural disaster.

What many may not realize is that every federal grant or loan comes with conditions on how the funding may be used. When you receive a federally-backed student loan, the money is meant for tuition and educational expenses. Spending the money for other things, such as taking a vacation, is prohibited and could be considered fraud. The misuse of federal funds comes with consequences. Take a closer look at the types of government loans available and what happens if you misuse them. 

Types of Government Loans

The government loan website provides a comprehensive database of all the types of funding accessible to the public. Take a closer look at the most common types of federal loans and the conditions concerning how the funding may be spent.

Student Loans

According to the Department of Education, “all loan funds must be used for your education expenses.” Education-related costs, such as tuition, living expenses, books, housing, and other expenditures associated with school are acceptable. The Department gives you some discretion to decide what entails education expenses. Paying for gas because you drive to school is acceptable. 

Student loans can’t be used for non-educational purposes, such as investments, to pay off credit card debt not related to school expenses, or for funding a vacation. It can be a fine line between what’s acceptable and what’s not. Investing student loan funding is not strictly illegal if you are earmarking the funds to pay for your near future school expenses. 

When in doubt, err on the side of caution. If the money you received to help you pay for school isn’t used for that purpose you can end up in legal trouble. If the school finds out, they could report you to the Department of Education. The Department has a hotline for anonymous tips if anyone suspects fraud, waste, or misuse of funding. The funds you were awarded could be taken away if the Department finds you misused them.

Housing and Urban Development Loans

There are government loans that are designed to assist individuals, small businesses, and communities. They include:

• Agriculture, Rural, and Farm Services Loans: These loans are meant to give farmers and rural residents assistance with their housing and small businesses, to improve their standard of living and create quality rural jobs. Some programs even provide funding for the promotion of farmers’ markets or to help farmers transition to organic practices. 
• Disaster Relief Loans: The Federal Emergency Management Agency has a disaster relief fund to assist states that suffered losses from a disaster with a comprehensive response and recovery effort. FEMA’s programs provide disaster relief loans to help homeowners rebuild or repair after a disaster. The Small Business Administration (SBA) provides small business loans to weather and survive a disaster that led to a loss of income or damage to the business location.

Government loans can only be used for their express purpose. If someone suspects fraud, or abuse involving FEMA disaster assistance programs, it can be reported to the Department of Homeland Security’s Inspector General’s Office. As for farm or rural-related fraud, you could be reported to the Farm Credit Administration. 

Paycheck Protection Programs

The SBA’s Paycheck Protection Program (PPP) provides business owners with loans to cover rent and payroll expenses such as wages, salaries, paid sick leave, and mortgages during this challenging time. Unfortunately, some business owners who may not need the funding have chosen to cash in to grow their business by using the funding for other purposes not related to protecting their workers. 

Penalties For Misuse

Loan fraud can lead to fines or imprisonment, as well as being barred from receiving loans in the future. According to FEMA: “Those who are caught trying to make fraudulent claims can be charged with a felony and, if convicted, face a maximum 30-year prison term and up to $250,000 in fines.” 

If you acquired funding you were not intending to use for the purpose of what the funds were earmarked for, it’s not too late. Consult with an attorney about how you can correct the situation.

Paying Back Loans

If you qualified for a government loan, it was likely you could prove that you were financially struggling. Spending loans on unnecessary purchases can make it more difficult to pay off the loans in the future. You may default on the loan you took without reaping the benefits of why you were approved in the first place. Debt collectors often use aggressive methods to get you to pay back the loan, adding another level of stress from debt collection.

In the case of student loans, getting the loan forgiven is extremely difficult, even if you declare bankruptcy. You may default, but you will still owe the loan over your lifetime if you don’t pay it back. Your tax refunds and wages may be garnished to pay off the loans. And the default will negatively impact your credit score, making it difficult to get a loan or credit card for seven years. 

In addition, your acceptance of the loan meant someone else in need may have been denied due to limits on how many people would receive funding. Think about the consequences of misusing government funding. It personally affects you and others in need. And if you believe you may have misused government funding, seek legal advice.

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