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 financial aid after a crisis or natural disaster.

Many may not realize that every federal grant or loan comes with conditions. When you receive a federally-backed student loan, the money should go toward tuition and educational expenses. Spending the money on other things, such as a vacation, is illegal and could be considered fraud.

The misuse of federal funds comes with severe 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 types of funding accessible to the public. Consider the most common types of federal loans and their conditions below.

Student Loans

According to the Department of Education, all loan funds must go toward education expenses. Education-related costs, such as tuition, living expenses, books, housing, and other expenditures are acceptable. The Department gives you some discretion to decide what that entails. For example, paying for gas because you drive to school is reasonable.

Student loans can’t go toward investments, unrelated credit card debt, or a vacation. It can be a fine line between what’s acceptable and what’s not.

Investing in 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 because 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.

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 becoming barred from receiving loans in the future. According to FEMA, fraudulent claims can be a felony. A conviction carries a maximum 30-year prison term and up to $250,000 in fines.

If you acquired funding you did not intend to use for their purpose, 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, you could prove that you were financially struggling. Spending loans on unnecessary purchases can make it a burden to pay off the loans in the future. Debt collectors often use aggressive methods to get you to pay the loan, adding another level of stress from debt collection.

Getting a student loan forgiven is extremely difficult, even if you declare bankruptcy. You may default but still owe the loan over your lifetime if you don’t pay it back. Your tax refunds and wages may become garnished to pay off the loans. Additionally, 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 received a denial due to funding limits. It personally affects you and others in need, and you should seek legal advice if you believe you may have misused government funding.

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