Skip class and collect the cash

Federal financial aid can help college students' dreams come true. It can also line  fraudsters' pockets with undeserved, unearned "aid," which costs taxpayers' money and steals deserving students' futures. The author outlines how ringleaders are committing this fraud and what universities and the general public can do to combat it.

In 2009, University of Phoenix fraud reports pinpointed 12 student records that all included the address of an Atwater, Calif., apartment complex — seven with the same apartment number (and presumably not the penthouse). Several months later, a university employee reported receiving a suspicious call from one of these students who appeared to be well-versed in school procedural information not normally known by first-time college applicants. The employee also noticed that the student's phone number matched numbers listed on student accounts that were in or nearing collection status. The situation continued to grow in size and suspicion as more students, with matching demographic information, made blunders such as accidentally contacting school advisors using the email accounts of other scheme members rather than their own.

Joe Agins, CFE, ACFE Regent, director of compliance investigations at Apollo Education Group Inc. (parent company of the University of Phoenix), and his fraud team later referred the information to the U.S. Department of Education Office of the Inspector General (ED-OIG), who then initiated an investigation along with the U.S. Postal Inspection Service.

In July 2013, Agins entered federal court to testify in this scheme. He had been involved in many aspects of the university's financial aid fraud detection and prevention process but was normally accustomed to "letting go" of cases once they passed from his hands to law enforcement. As he watched the defendant enter the courtroom it occurred to him that after years of interacting with thousands of suspected fraudsters via paper and a computer screen, this was the first time he had ever seen one face-to-face. The charges: conspiracy to commit mail fraud, mail fraud and aggravated identity theft.

Several days later, the verdict was in. Guilty! Other members of the scheme rushed to the prosecutor's office to ask for plea deals. Earlier in the month, the defendant's two sisters and another associate had already pleaded guilty on charges stemming from the same investigation. Now everyone could pack up and go home, move on to other things and forget about federal student aid (FSA) fraud for a while. Right? Wrong.

While much of the general public still seems to be largely unaware of their existence, FSA fraud schemes have been plaguing higher education for years and have been growing in notoriety. The ED-OIG, which issued an "urgent call to action" in its 2011 "  Investigative Program Advisory Report: Distance Education Fraud Rings," referencing a dramatic increase in "fraud ring" activity within federal student loan programs.

In a May 2013 report to Congress, the OIG determined that the population of SFA recipients potentially participating in fraud rings had increased 82 percent from 2009 to 2012 (to approximately 34,000) causing an estimated probable fraud loss during that time of $187 million. (See ED-OIG "  Semiannual Report to Congress," No. 66, May 2013.)

And the U.S. isn't alone in this plight. The U.K.'s Student Loan Company (SLC) reported in mid-2013 that £6.5 million of taxpayers' money had been paid out on fraudulent student loan applications in the current financial year, up from less than £1 million in the previous year. Similar student loan fraud ring cases have also been publicized in New Zealand (see "  Home detention for student loan fraud," Otago Daily Times, June 6, 2013) and in China (see "  Four jailed over student loan fraud," by Austin Chiu, South China Morning Post, Nov. 27, 2010).

WHAT IS A STUDENT FINANCIAL AID FRAUD SCHEME?

While private loan programs also have been hit in the U.S., the typical target for scheme perpetrators is federal student aid made possible under Title IV of the Higher Education Act of 1965, including grants and loans. To put things in perspective: The Education Department awarded $509.9 billion in FSA funds to 53.8 million recipients from award year 2009 through award year 2012, according to the Jan. 17, 2013, DOE-OIG "  Management Information Report: Student Aid Fraud Ring Assessment." The Education Department Office of Federal Student Aid in its  2013 annual report stated that outstanding federal student loan debt crossed the $1 trillion threshold last year.

According to the November 2013 "  Quarterly Report on Household Debt and Credit," published by the Federal Bank of New York, student loan debt is the second-largest consumer debt category, and it's among the fastest-growing.

People have historically abused FSA programs in various ways. For example:

• Applicants can score larger award amounts by underreporting their income or misrepresenting their filing status on the federal application for student financial aid (FAFSA).
• Individuals who never earned a high school diploma or GED (one or the other is required for financial aid eligibility) may fabricate their prior education status.
• Students may squander their financial aid on luxury items, such as boats, vacations and other forms of waste unrelated to student learning. 

Some enroll in school for a short period and acquire aid with no intention of actually getting an education. Even if schools are able to identify these solitary fraudsters — commonly referred to as "Pell chasers" or "Pell runners" — these cases are tough to pursue criminally due to difficulty with proving intent. (The nicknames reference Federal Pell grants, which unlike loans, don't have to be repaid and usually are awarded only to undergraduate students.) It's a different story, however, when fraud examiners can trace individuals back to organized networks — aka, FSA fraud schemes or rings.