Fighting Against the $187 Million Financial Aid Fraud Problem

From having credit card information stolen to catfishing on online dating sites, online fraud is definitely not a new concept. The anonymity of being behind a computer screen has created new opportunities for new scams, and no industry is immune—including education.

As online education has become an increasingly popular choice for students seeking to take classes anytime, anywhere, it has also engendered new illicit activity in the form of financial aid fraud rings. While most have heard of online fraud, financial aid fraud doesn’t often make the news. Few know the mechanics of it. How does it happen? Who is the victim? How can we prevent it?

How Financial Aid Fraud Rings Work

According to the Department of Education, online identity fraud has led to a loss of over $187 million in federal student aid from 2009-2012. Roughly $150 billion is distributed in federal grants and loans each year. Despite efforts from law enforcement, it continues to be a big issue within higher education. In this type of scam, the two main players are a ringleader and a straw student. The ringleader, often accompanied by accomplices, secures identifying information from a member of the ring or by stealing it. Using the straw student’s information, the ring can then apply for admission into online education programs and secure financial aid.

At universities, part of the problem is that the initial actions of the fraud ring won’t raise any red flags. The targeted school’s systems only register a new student with valid information. The ring continues to maintain the charade, doing the bare minimum needed for the chosen course to show participation and qualify for financial aid disbursement. Then, once the university is paid and the straw student receives their federal aid refund (the remaining funds after the institution has collected tuition, which are meant to be used for related educational expenses like textbooks, transportation, living costs, etc.), the fake student abandons their courses, leaving the members of the ring free to split up the refund money. Because the ring is exploiting a vulnerability in the financial aid system, neither the institution nor the federal government may be aware that a crime has even taken place – a crime that costs the federal government, and taxpayers, millions of dollars that will never be repaid.

In the Headlines

Financial aid fraud might not be something a lot of people are aware of, but in taking a closer look, it’s easy to unearth coverage of a number of cases over the years. There was the 2011 case of an inmate in South Carolina who was able tosecure more than $460,000 in funds after using the information of 23 unwitting fellow inmates. In 2012, federal officials cracked down on a major student aid fraud ring in California and charged 21 individuals whocollected $770,000 in federal student aid by targeting 15 different institutions. One of the biggest cases involved three ringleaders and 10 straw students in Montgomery, Alabama, who defrauded the Department of Education of more than $3 million from 2008 to 2012.

Impact of Financial Aid Fraud

Despite lessons from these and other cases as well as FBI involvement, fraud rings continue to take advantage of the financial aid system, and taxpayers aren’t the only victims. Every year, Congress approves a federal budget that indicates how much will be allotted for financial aid. With fraud rings successfully syphoning off financial aid funds, these dollars lost to criminals are no longer available to legitimate students who may rely on financial aid to afford a college education. In cases like the one in South Carolina, the straw students’ personal information may be used without their knowledge. They become victims of identity theft. Fraud can direly affect credit reports and scores. The fight to have debt expunged takes significant time and effort. On a larger scale, cases of financial aid fraud can inflate the loan default rate at the colleges and universities involved because these straw students default on any federal loans taken out.

Fighting Fraud with Technology

Institutions may be hesitant to air dirty laundry about financial aid fraud happening on their campuses, but some are taking a proactive approach to detecting and deterring cases of fraud. More and more institutions are focusing on the verification of the identity of their online students, which protects not only institutions but also individuals whose identity may have been stolen.

Technology, too, is catching up with physical modes of identification. Just as a student would show their student ID card to verify their identity when visiting an on-campus financial aid office, now they present their face to a webcam. It’s becoming more common to see institutions implement keystroke biometrics and face-recognition software to verify the identity of students.

Just as technology makes online education possible, it brings with it a number of new risks. Identity protection technologies are just the beginning. Work is underway to develop and provide solutions to help colleges and universities battle financial aid fraud. The ultimate goal is to ensure financial aid funds remain available to students who truly need assistance to pursue and attain their degree.