Hitting Hard on Fraud

A fast-moving effort by the U.S. Education Department to crack down on financial aid fraud faces a common dilemma in higher education: how to protect the integrity of government aid coffers without harming students.

Fraud rings that use “straw students” to pilfer federal financial aid are a growing problem, particularly in online programs at largely open-access community colleges and for-profit institutions. But proposed regulatory fixes, even if well-meaning, could create layers of red tape for colleges and make it harder for some students to receive financial aid.

“It’s a balancing act,” said Evan Montague, dean of students for Lansing Community College. Montague said the fraud rings are a threat, but that his college has adequate safeguards in place, thanks to a recent upgrade. He worries that the proposed federal policies would be an added “regulatory burden.”

The department’s Office of the Inspector General has seen a dramatic increase in online education scams, according to a report released last month. The crimes typically feature a ringleader and phony students who enroll, receive federal aid and split the proceeds with the ringleader. Community colleges may be targeted more often than for-profits because they typically charge less in tuition, leaving more of a leftover aid balance for thieves to pocket.

Federal investigators have busted 42 fraud rings since 2005, resulting in $7.5 million in fines against the perpetrators, who range from savvy identity thieves with multiple aliases to illiterate straw students. But that’s just the tip of the iceberg, according to the report, and the department lacks the resources to pursue most of the cases it receives. Investigators were working on 49 new complaints about fraud rings as of August.

The rings first became a problem for the Apollo Group in 2008, said James Berg, Apollo's vice president for ethics and compliance. Since then the company has identified over 15,000 fraudulent students, many of whom enrolled at its Axia College, an open enrollment institution. Apollo has referred about 750 fraud rings to the inspector general, with the average scheme the company has uncovered involving 19 students.

The report from the inspector general features nine recommendations to make it harder for fraudsters. They include requirements for colleges to confirm students’ identities and collect and retain their computer IP addresses, as well as a proposed statutory change to the cost of attendance calculation for students enrolled in online programs, which would limit federal aid payments for room and board, and for “other costs that distance education programs do not incur.”

Federal regulators, department officials and the Republican and Democratic leaders of the U.S. House of Representatives' Committee on Education and the Workforce have weighed in with letters, urging quick action on the report. The department has formed a task force to create a “final corrective action plan” by November 10. Sara Gast, a department spokeswoman, said the task force would work closely with colleges to iron out the details of any possible new rules.

“The team is continuing to identify what actions can be undertaken swiftly that will have the most impact on curbing fraudulent practices,” Gast said in a statement, adding that the task force “is specifically looking at what steps in the student aid application process and systems changes could be implemented to flag potential fraudulent activity.”

Berg said Apollo devotes substantial resources to combating the rings, including employee training programs. Apollo's "fraud squad" has improved what Berg calls its "catch rate," which refers to the percentage of phony students they can identify before the students receive federal aid. That rate was over 80 percent last month, Berg said. Apollo has regular meetings with staff from the inspector general's office, which has studied the company's fraud-prevention techniques.

"We've got antennae out there," said Berg, adding that "this is an industrywide issue."

Using a 'Sledgehammer'

Officials representing both community and for-profit colleges said fraud rings are a serious problem. But some argue that their institutions are responding to the challenge, and that the proposed regulations go too far and would have unintended consequences.

The required collection of IP addresses, for example, could threaten student privacy. And particularly rankling to community colleges is the proposed limit on the use of financial aid for online education expenses other than tuition and fees, which some observers called discriminatory to needy online students.

Some of the recommendations make sense, said Christine Mullins, executive director of the Instructional Technology Council, which is affiliated with the American Association of Community Colleges and represents many community colleges with large online programs. She likes the idea for the Education Department to work with the Department of Justice to ensure that prisoners are not being used as straw students and receiving aid for which they are ineligible -- the inspector general busted one scheme in which an alleged thief stole the identity of 50 inmates, enrolled them and made off with more than $300,000.

But Mullins said the financial aid limitation and several other recommendations “seemed a little draconian,” and are “like taking a sledgehammer to this issue, which isn’t necessary.” (On Friday she submitted a letter to the Education Department detailing the council’s concerns.)

The American Public University System, however, supports the proposal to limit student aid eligibility to tuition, fees and textbooks.

“Institutions with a commitment to maintaining low costs should not be targeted by students with an interest in borrowing money in excess of these costs,” Wallace E. Boston, the system’s president and chief executive officer, said in a written statement.

Michael B. Goldstein, a lawyer who heads the higher education practice at the Washington law firm Dow Lohnes, said the inspector general’s role is to identify weaknesses in regulation, not to think about all the practical applications of fixes they recommend. The Education Department and Congress will likely reel back some of the stronger suggestions, he said.

“There need to be measures to constrain these criminals,” Goldstein said. “But it has to be done so it doesn’t constrain a very valuable, and increasingly valuable, portion of higher education.”

Big Busts

The financial aid scams are typically run by a ringleader who rounds up students who willingly participate, according to the inspector general. Most of the straw students have no intention of earning a credential. They use legitimate identities to enroll in class, often online, and receive federal aid -- including Pell Grants and loans. When the checks arrive, the students and ringleaders split the money and vanish, often without ever attending class.

Ringleaders sometimes work with deputies to recruit many students.

“In one ongoing investigation of a very large fraud ring, we interviewed and obtained affidavits from 45 participants, all of whom admitted they did not intend to earn a degree, certificate or other credential,” the report stated. “Some of these individuals are illiterate and were unable to write a statement or read a summary of their verbal statement to our investigators.”

The rapid growth of online education has been a boon to fraud rings, according to the inspector general, because students rarely have to be physically present when they apply for aid.

Federal investigators have had success in prosecuting online financial aid schemes, the most notable being the 2009 convictions of 64 people who targeted Rio Salado College, a major online provider that is part of Phoenix's Maricopa Community College District, making off with $538,000 in federal aid.

But the report said big busts are too labor-intensive to pursue in court: “It is unlikely that such a robust effort to prosecute all participants in such a large investigation will be repeated in the future.”

Lansing Community College was hit by a fraud ring last year, and has since strengthened its financial aid abuse detection efforts. The college also changed how it distributes aid.

The fraud emerged when administrators noticed that a dozen students were sharing the same IP address and a house in Michigan City, Ind. They eventually referred the case to the inspector general.

The college then began looking for patterns and activities that raised red flags, such as out-of-state students who apply for financial aid. They also enlisted the help of faculty members to identify “students who had no interest in participation in the courses,” Montague said.

Any staff member can refer suspicious student behavior to the college’s judicial affairs department. For example, Montague said a student affairs employee might send a tip about a student who called six times in one week to ask about financial aid payments.

This fall the college began delaying its disbursement of federal aid, including Pell Grants and loans, as a further attempt to prevent fraud. Students receive aid for books and supplies at the beginning of the semester. The first larger aid installment, however, wasn't sent out until September 26, which is four weeks into the semester. Previously the college released all of the funds a day before the semester began. A second disbursement is scheduled for later this fall.

“We’re splitting it throughout the semester,” Montague said, to help ensure that “we don’t have phantom students.”

Some students were frustrated by the delayed aid payments, said Montague. But others say it has helped them budget better. Montague is confident that the strengthened fraud protection efforts are working. They can take a lot of work, however. And he worries about the staff time and money needed to comply with possible new federal regulations.

With more than 30,000 total students, Montague said Lansing administrators already have their hands full. The federal government currently requires colleges to verify some student applications for financial aid, often by using tax returns. While a relatively small percentage of students should trigger those checks, according to the government, Montague said applications for 62 percent of Lansing students require verification.

“We’re reviewing a heck of a lot of paper,” he said.