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Financial Aid Fraud Rings

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by Christine Mullins
Executive Director, Instrucational Technology Council 

In late January, federal regulators and higher education representatives met as part of the President’s Forum in Washington D.C. to discuss how to respond to financial aid fraud rings that are targeting distance education programs at community colleges and for-profit institutions.

The participants discussed the investigative advisory report the Inspector General issued on Sept. 26, 2011 which identified an increasing number of cases involving groups of individuals, or fraud rings, that are comprised of straw students that submit multiple student financial aid applications, complete the minimal amount of coursework needed to establish participation in the academic program, receive the associated financial aid disbursements, and disappear without any intention of ever completing the course.  The Department of Education issued a Dear Colleague letter to alert higher education officials to this problem on ’s Oct. 20, 2011.

William Hamel, assistant inspector general for investigations for the U.S. Department of Education, and author of the investigative report, said the Department is “not keeping pace with technology” while students take advantage of the “anonymity of the Internet.”  Educators and regulators need to find ways to verify student identity to deter this fraud.

Institutions should review their policies on how they disburse Title IV funds to students, and the internal triggers that prompt staff to investigate fraud.  They need to dissuade perpetrators from participating in student financial aid fraud, so these criminals don’t see this as an easy way to obtain quick cash.

David Bergeron, deputy assistant secretary of programs, planning and innovation at the Department of Education, said the Department does not want to create barriers for legitimate students—verification rules should be flexible since different solutions work better at different colleges.  He said that they don’t want to give perpetrators a roadmap to follow—since they will modify their approach based on how colleges respond.  But it is helpful to give colleges some ideas for ways they might proceed.  Hamel recommended colleges continuously update their procedures and think “three steps ahead” of the fraud rings.  The American Association of Community Colleges will release such a list next week, “Preventing Abuse in Federal Student Aid: Community College Practices.”

Since fraud ring leaders often use the same computer to register several “students,” college registrars have successfully unveiled criminal activity when they discovered groups of students that enrolled in courses using the same IP address.  Computer experts warn that this detection approach could prove problematic as more sophisticated rings use technology to trick these triggering mechanisms, but it has worked so far.

Hamel noted that creating a paper trail will make it easier for the OIG to prosecute these crimes.  Perpetrators who enroll in online courses are especially vulnerable to prosecution since students conduct nearly everything online or electronically.

Hamel said institutions should report any suspicious activity or discrepancies to the Office of the Inspector General which is collecting and tracking this information.  He stated that institutions will not be liable for money disbursed to fraudulent students, if fraud was not “apparent.”  However, the Department will “question” the institution’s liability if the fraud was blatant or if, for example, the college referred a suspicious incident to the OIG and disbursed the money anyway.  Institutions should withhold financial aid from students if they have any suspicions, despite any pleas from student to release the funding.

Justin Draeger, president of National Association of Student Financial Aid Administrators, said that withholding financial aid funds can put institutions in a precarious bind.  Legitimate students have successfully filed EEOC complaints against institutions that delayed financial aid dispersements or withheld funds inappropriately.  The Inspector General has been inundated with reports and cannot respond to colleges quickly.  Deserving students could be left in limbo.  Distance learning students also have mortgages and take lower-wage jobs so they can attend college.  Others argued that state regulations can create barriers – for example, Massachusetts imposes stringent rules on data privacy.

Meanwhile, Draeger noted that the perpetrators of these crimes are often belligerent and intimidate financial aid staff relentlessly to get money from the institution.  They threaten to file EEOC complaints, notify the college president, and alert their congressman if they don’t receive the financial aid money they seek right away.

Since 2008, James Berg, vice president and chief ethics and compliance officer for the Apollo Group said the University of Phoenix has discovered 810 fraud rings involving more than 18,000 individuals.  They have referred 747 of these schemes to the OIG and 15 should be prosecuted soon.  Berg noted that some fraud rings use stolen identities.  Individuals are unaware criminals are using their personal information in this manner and have a hard time removing their names from college watch lists.  The average ring involves 19 individuals and the ring leader often participates in the fraud.  The postal inspector can also legally prosecute these crimes if the US mail service is involved.

The University of Phoenix, which has 420,000 students, has devoted four employees to this issue and has implemented a series of flags or triggers that prevented the fraudulent disbursement of $76 million.  Berg said the fraud slowed dramatically when they required students to participate in an orientation program at registration.  Any obstacles that slow down the reimbursement process help.  They also created a toll free number students can use to report any types of cheating or fraud

Wallace Boston, president of American Public University, said his institution’s financial aid office received 96,000 phone calls from one location, and 68,000 calls from two zip codes in Mississippi from financial aid fraud perpetrators.  The college hired private detectives to discover all of the calls originated from a barber shop and an apartment complex.  Creating a cross-departmental team that encourages offices to communicate with one another about suspicious activities they encounter helps.

Vigilant employees at Rio Salado Community College reported 64 individuals who attempted to steal $538,000 in student financial aid to the Office of the Inspector General.  The college did not disburse any financial aid to the students, who have since been indicted, convicted and sentenced.  Rio Salado temporarily suspended new enrollments from student in four states because they feared a repeated offence.

Chris Bustamante, president of Rio Salado College, said his institution has put the following in place:

  • A three-person “fraud squad” that is charged with reporting suspicious activity
  • Enhanced training for financial aid staff
  • Students must exhibit satisfactory academic performance before financial aid is disbursed
  • The college waits two weeks before disbursing the first financial aid payment
  • Partial payments are disbursed throughout the academic term
  • Proctored exams are required for most courses
  • Financial aid is denied to anyone who is suspicious (need a policy in place to do this)
  • Financial aid staff receive the confidence to say “no” when they are threatened
  • Academic activity in increased early in the semester
  • Student orientation is required (a step that has also improved completion rates)
  • Vigorous verification procedures are required (especially for out-of-state students).  Arizona colleges are required to ask in-state students about their U.S. citizenship.
  • Staff looks twice at students who list multiple home addresses
  • Staff looks twice at students who use similar IP or home addresses
  • Staff looks twice at unusual enrollment clusters
  • Staff has used Google Earth to verify buildings exist at home address (and not a field or office park)
  • Faculty must report similar assignments

Ed Klonoski from Charter Oak University said that even small colleges cannot afford not to be vigilant.  There is a cost to all colleges, whether they are under attack or not.  He thinks perpetrators avoided targeting Charter Oak because they require students provide a copy of their high school transcript to enroll.  There is no one single bullet for every college.

All of the panelists agreed that creating inter-departmental task forces offers colleges the most successful way to deter and detect fraudulent activity.  Faculty are important watchdogs and colleges should encourage them to report on student attendance issues, unsatisfactory progress, or lack of student engagement.  Unfortunately, faculty are often the least engaged players in this enterprise.  Adjuncts are particularly left in the dark on this issue.  Taking attendance can be inconvenient, time consuming, perceived as demeaning—to faculty and students—and distract from the learning process.

David Adams, deputy general counsel and vice president for regulatory affairs at Kaplan, noted that institutions must determine when they should report fraudulent activities to the OIG.  For example, they don’t want to overload the OIG by reporting every student who falsifies his or her high-school diploma, but they should report any systematic or clear-cut instances of fraud.

David Bergeron, deputy assistant secretary of programs, planning and innovation at the U.S. Department of Education, said the Department has created a task force to investigate this issue.  They will consider modifying regulations issued in October 2009 regarding distance learning student authentication procedures.  However, he stressed that solutions need to work for distance learning institutions.  Congress would propose any changes when it reauthorizes the Higher Education Act in 2014.