With more than $150 billion distributed each year by the federal government, student financial aid has become a top target for identity fraud. Tens of millions of dollars are lost each year to fraudsters applying for student aid using stolen identities or by scheming with student applicants.
The most recent case of financial aid fraud to be prosecuted involved a 66-year old owner of a printing company. Bobby R. Lowe of Harvey, Louisiana, conspired with student applicants to produce false school transcripts which were provided to the Office of Admissions at Delgado Community College in New Orleans. Lowes was charged with one count of conspiracy to commit mail fraud and faces up to five years in prison and fines of up to $250,000.
There’s Big Money in Financial Aid Fraud
In an age of rampant identity fraud, financial aid fraud doesn’t tend to make the headlines, but activity is picking up. According to the Department of Education, nearly $200 million in federal student aid was lost to fraud over a three-year period from 2011 to 2014. That is $200 million that did not go to deserving students. Some of the larger fraud cases have involved hundreds of thousands of dollars or more. In California, 21 people were charged for operating a major student aid fraud ring in which they collected $770,000. One of the biggest cases occurred in Montgomery, Alabama with three ringleaders operating with 10 straw students to defraud the Department of Education of more than $3 million.
Although efforts are being made to reduce the incidences of fraud, the system is still vulnerable, especially when it comes to detecting first-time fraudsters. When new students are registered, it doesn’t raise any red flags. It is only when a student’s identity is used more than once in applying for aid that the system can identify a potential fraud.
It becomes even easier for scammers to falsely apply for federal aid when considering how the FAFSA works. Unlike loan applications with private banks, the FAFSA does not require solid credit or any credit for that matter; it simply requires personal identifying information. This greatly expands the pool of potential applications to submit since the identity does not need an established credit history.
A typical scheme involves a ringleader and one or more accomplices. The accomplices pose as student applicants, using their identities or stolen identities to apply for admission and then apply for financial aid. The student accomplices register for classes in order to qualify for financial aid. Once the financial aid is disbursed, the students drop their classes. The university does receive the portion of aid designated for tuition, but the balance, which can be used for books and living costs, is paid to the student. At this point, neither the university nor the federal government has any reason to suspect that a fraud has occurred. The ring can then start the process again using new student identities and/or by targeting another university.
The DOE has added several additional verification procedures to prevent fraud, such as obtaining tax returns directly from the IRS and requesting four of the applicants most recent bank statements.