Student Aid Fraud: Detection & Prevention
Know the warning signs to protect your school and taxpayers from fraudsters.
According to the November 2013 Quarterly Report on Household Debt and Credit, student loan debt is the second-largest consumer debt category, and among the fastest growing.
At the same time, federal student aid fraud has grown in notoriety over the past few years. The growing number of enrollments combined with the soaring costs of education means fraud schemes are more common than ever.
If an applicant is caught committing fraud, the consequences are severe. They’ll lose the aid, be expelled and banned from applying for student aid again. Plus, they may face a wide range of criminal charges including mail fraud, wire fraud, identity theft, submitting fictitious claims, making false statements and more.
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Yet the consequences don’t stop all fraudsters. It’s still relatively easy to defraud schools because most federal aid does not require a credit check, and how the money is spent is not tightly restricted.
This article will explain the different ways fraud occurs in student aid applications, the warning signs to look for and tips to prevent your school from being victimized.
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In 2013, the Office of Inspector General determined that the number of student aid recipients potentially participating in fraud rings rose 82 per cent in three years, a loss of approximately $187 million.
The US is not alone in experiencing financial student aid fraud. Also in 2013, the UK’s Student Loan Company reported that £6.5 million had been paid out to fraudulent applications, up from less than £1 million the year prior.
One reason for this increase may be the rise of the Internet. Before the world wide web, applicants would have to go into the school and apply for aid in person with all their documents and proof of identity. Now, a single person can create multiple online accounts and apply for aid under each.
Another reason may be the growing popularity of open access, lower-cost schools. Community colleges are less expensive than other schools, meaning fraudsters receive more left-over funds after the tuition has been paid. The lower the tuition, the more money left over.
Underreporting Income
Intentionally underreporting income is one of the most common types of student aid fraud. Falsifying individual and family income to appear lower helps ensure the applicant will receive a larger amount of aid.
The Department of Education conducted one of the only large-scale audits of grant recipients in the late 1990s. The audit of 2.3 million 1995-96 Pell grant recipients found that 4.4 per cent had reported income figures on their financial aid applications that were lower than the figures reported to the IRS.
Some fraudsters will blatantly lie about their income or how much tax they pay. Others may lie about their assets or intentionally underreport additional forms of income (such as dividends). This type of financial fraud is common because only about one-third of applicants are asked to provide documentation of the data reported on their application form.
Fabricating Qualifications
To qualify for federal student aid, applicants must meet several eligibility criteria. An applicant must possess either a high school diploma or a recognized equivalent, such as a GED. Student aid fraudsters may purchase fake documents, such as a diploma or transcript, to include in their application form.
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Applicants must also receive certain test scores on assessment exams to qualify for grants. A fraudster may manipulate their assessment scores to ensure they qualify. In the Baltimore area, a school test proctor and an admissions officer pled guilty in a scheme to manipulate test scores of students who were taking exams to qualify for grants.
Hiding Assets
In another attempt to conceal their finances further, an applicant may underreport assets by hiding cash or buying Zero-Coupon Bonds. These types of bonds don’t appear on income tax returns since they don’t report any interest, dividends or capital gains until sold.
Enrolling then Unenrolling
Some fraudsters will enroll at an institution, without any intention of truly attending, to receive aid. Essentially, the federal or state government will send the grant to the school to pay the fee for tuition. Whatever amount is left over is given to the student under the impression that the money will be used toward education-related expenses such as textbooks.
This scheme may seem less strategic than the others. However, even if the school can identify the fraudster, these cases are tough to pursue criminally due to difficulty proving intent.
Pretending to be Someone Else
Identity theft is a common form of fraud, often used to open bank accounts, lines of credit and more. However, it’s also used to obtain student aid. In fact, the FBI reported that a former prison inmate from a jail in South Carolina pled guilty to using fellow inmate’s identities to apply for federal student aid.
Pretending to be someone else to receive financial aid is growing in popularity, possibly due to the Internet and how easy it is for someone to receive aid without ever being within a mile of the campus.
Guardianship Transfers
Since student aid is need-based, part of the application process requires examining the income and assets of the student’s support system. The government assumes that a student-to-be from a wealthy family will receive some assistance, and will need less financial aid.
The latest student aid fraud scheme involves affluent parents transferring legal guardianship of their college-bound children to a less wealthy relative or friend. If someone other than their parents are their legal guardian, students can declare themselves financially independent, making their parents’ earnings irrelevant when they apply for need-based grants.
In the news
According to ProPublica Illinois, nearly 50 families from Lake County went to court to give up legal guardianship of their children to relatives or friends. The reporters identified 10 similar cases in McHenry County and two in Cook County.
The financial aid program in Illinois provides up to $5,300 per year for students in need and so by exploiting the guardianship law, prospective students are eligible for aid they shouldn’t be. Eric Zarnikow, executive director of the Illinois Student Assistance Commission warns that “if this works in Illinois, it likely works in other states”.
The state’s law governing guardianship, the Illinois Probate Act, does not specify circumstances in which a judge should deny transfers. Lawmakers are currently looking at ways to close the legal loophole, either by tweaking state laws or educating judges who see cases like these.
Loan fraud doesn't always look like a student working for cash throughout the summer and then reporting zero income. Fraudsters have become creative. They might be filing multiple applications from the same IP address. Or, they might report zero interest yet their income says otherwise.
When you investigate student aid fraud, you need to be aware that red flags can appear anywhere, not just the yearly income line. The Huffington Post shares a number of red flags, including:
- Several registrations from similar locations out of state
- Multiple uses of the same physical address or IP address
- Multiple uses of the same bank account
- The same emergency contact for multiple registrants
- Large financial aid refunds or disbursements
- Attendance at several colleges
- A large student loan balance but no degree
FinAid.org outlines a number of red flags related to income:
- Interest and dividend amounts don’t match up to wages
- No alimony income or payments if parents are separated
- No business or farm income if parents are self-employed
- Round numbers like $0, $500 or $1000
- The tax return doesn’t appear to be genuine
Occasionally, what looks like a warning sign might be a genuine error. The forms can be confusing for those unfamiliar with them, and numbers aren’t everyone’s strong suit.
In any case, use common sense. If they underreport their income by thousands, it may be fraud. If their discrepancy is small and doesn’t change their eligibility, it’s likely an honest mistake but should still be brought to their attention. Send a letter noting the alleged inconsistencies as well as penalties for fraud.
The Department of Education has begun using a database that can flag applicants with unusual enrollment histories. The tool, for instance, may flag an applicant who has applied for aid from several schools in a single year.
The department forwards this information to a financial aid officer at the victim school, who will then request additional proof from the applicant. The response dictates whether the grant is provided or denied.
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This process helped the Department of Education catch more than 120,000 fraudsters in the 2013-14 school year.
To help catch fraudsters, FinAid.org says there are three strategies schools can use to prevent student loan fraud: obtain third-party documentation, make inferences and establish policies.
Third-Party Documentation
Third-party documentation is the best way to confirm the validity of an applicant’s answers.
Reach out directly to the applicant’s high school and ask for their transcripts or assessment scores. If the applicant claims they only live with one parent, ask for proof of legal separation. Compare last year’s tax returns to the year prior or, even better, get permission to obtain their tax returns directly from the IRS.
Make Inferences
Another way to prevent student aid fraud is to use readily available information to detect inconsistencies in an application.
Look at their answers critically. Are their mortgage payments possible with the reported monthly income? How do their interest and dividend earnings stack up against their assets? Don’t simply accept answers at face value; think about the picture they’ve drawn.
Establish Policies
The final tip for prevention is to establish policies deterring fraud.
Implement a zero-tolerance policy requiring the expulsion of any student caught committing fraud on application forms. Demand that anyone with a tip report it to a financial aid officer or directly to the Department of Education. Use the policy as an opportunity to inform the reader of the criminal charges for providing false information.
Having a plan in place can help you detect fraud faster and prevent it better. Download our fraud response plan template to get started.