Pell Grant Scams

A recent report revealed that literally thousands of people in the state of Michigan collected Pell Grants last year — and never attended classes. Colleges in the state were stuck with the tab and must repay millions of dollars to the federal government.

One example cited in Michigan is that of Henry Ford Community College, in Dearborn, which will have to repay nearly 10 percent of the Pell Grants its students received, totalling more than four million dollars. The money will have to be paid back this year or the school will be at risk of losing its eligibility to receive federal aid money. In order to repay the funds, school officials say, a tuition increase will likely be required.

The problem is by no means a new one — nor is it limited to colleges in Michigan — but it has burgeoned in recent years.

The exact cost to taxpayers is unknown, because record keeping has not kept up with the disbursements. One expert estimates that nearly 4 percent of the $33.5 billion in annual Pell Grant funds awarded annually (as of 2011-12) is being collected fraudulently. If this estimate is anywhere near correct, more than a billion dollars in taxpayer money was siphoned off in the last year, alone.

Scammers are targeting schools at an increasingly alarming rate, particularly community colleges and online programs. Recently, The Arizona Republic reported that hundreds of thousands of dollars worth of grants and loans were siphoned through Rio Salado College, an online school affiliated with Maricopa Community Colleges, in a series of schemes over the course of several years. In the wake of the fraud, Rio Salado College, which already boasts more than 65,000 students, issued a statement indicating that it has increased the scrutiny and security of its application processes.

The college hopes that an improvement in its application monitoring procedures will help to weed out the stolen identities and the straw — fake — students such as those used by the fraud rings. In the scheme, leaders utilized personal information they had obtained illegally, or had been given by people they paid off, to apply for federal financial aid in the form of Pell grants and loans. In one case using straw students, the “mastermind” used the names and social security numbers of state prison inmates with which he was working. He would apply for aid under the prisoners’ names, register for classes, drop the classes and pocket the money. The inmates then received a small cut of the illegal proceeds for use of their information. In another case the fraud continued over a period of several years before it was eventually detected by school and federal officials.

Rio Salado College is certainly not the only institution out there that has been targeted by financial aid fraudsters. According to a 2011 report issued by the Inspector General of the United States Department of Education, cases of financial aid fraud in distance learning settings increased almost six fold in the years between 2005 and 2011. In 2005, the Inspector General’s office opened 16 such investigations, while more than 100 financial aid fraud investigations were opened by the office in 2011.

It is not just smaller schools like Rio Salado College that have fallen to financial aid crimes. Some of the biggest players in the distance and online learning market have also been affected. The Arizona Republic reported that Apollo Group, the parent company of online education leviathan University of Phoenix, has referred almost 1,000 possible fraud schemes to federal investigators over the last three years. Of these, fewer than five percent have led to prosecutions.

Investigation and enforcement of financial aid-related crimes has proven difficult. The need for broad–based inclusivity in federal aid programs combined with the nature of online learning processes has left gaps in the security and verification procedures for financial aid applications at such schools. This, in turn, has made financial aid crimes more difficult to detect at these schools where the students are not physically present. The federal government does not require verification of a student’s identity by the schools when they apply for financial aid. The schools are free to adopt their own identity-confirmation procedures. In schools where students’ existence are not easily identifiable, a financial aid system based largely on the concept of brick and mortar education is vulnerable to crime. In spite of across the board acknowledgement of increased financial aid fraud, there have only been a couple hundred convictions in such cases over the last seven years. Officials say that this fails to reflect the scope of the financial aid fraud problem because in most cases only ringleaders are prosecuted, while many others were involved in the crimes themselves.

While private, for-profit online schools, like University of Phoenix, are often targets of financial aid crime, public schools — such as Rio Salado — college remain favorite victims of fraud rings. Public colleges tend to have much lower tuition rates, and their online students are not required to register in person. This means that criminals are able to pocket a much larger difference between the cost of classes that they register for and the financial aid that they are given than they otherwise would at a private school. Moreover, the criminals are at no point required to have their identities confirmed in person.

Pell grants are often favorite targets of financial aid rings because they have no repayment requirements. This means that the possibility of detecting such fraud is significantly diminished with the passage of time. Loans, on the other hand, would invite scrutiny and investigation once the ringleaders or their straw students failed to make payments on the principal.

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