Two years ago, in the wake of an alarming report from its inspector general on fraud in federal student-aid programs, the U.S. Education Department announced that it would write new rules to protect taxpayer dollars from abuse.
But when a negotiating panel met in Washington this year to craft new "program integrity" rules, the subject of fraud barely came up. The department offered only one proposal to deal with fraud, and it quickly abandoned the idea after colleges criticized the plan.
By the end of the fourth negotiating session, last month, the package of rules contained nothing to address a problem that the inspector general says grew by 82 percent from 2009 to 2012.
That troubles Eric Rodriguez and others on the front lines of fraud prevention and detection. During the rule-making, Mr. Rodriguez, a certified fraud examiner with more than 30 years of experience, repeatedly reminded negotiators that they were supposed to tackle fraud. He spoke twice during public-comment periods, and pressed panelists privately between negotiating sessions.
Mr. Rodriguez, who investigates fraud cases on behalf of the department for Nelnet, which services student loans, is disappointed that the issue was dropped from the agenda. "Speaking for myself, it’s a serious issue and they really need to get some controls in place," he said in an interview. "The department needs to hold a rule-making just on this."
The extent of the damage done by student-aid fraud isn’t known, but the inspector general estimated last year that as many as 85,000 students may have participated in fraud rings from 2009 to 2012, at a potential cost to taxpayers of $187-million.
That’s a significant loss, but it’s still a very small share of the $546-billion that the government disbursed in grants and loans during those four years. Some financial-aid administrators say the comparison shows that the problem has been blown out of proportion.
Government investigators nonetheless take student-aid fraud seriously. Over the past decade, the Education Department’s inspectors general have testified before Congress five times on the susceptibility of online programs to fraud and abuse.
Since 2005, the Office of Inspector General has investigated more than 132 suspected fraud rings, secured more than 478 indictments, and recovered $20-million in stolen student aid. Sentences have typically ranged from one to six years in jail for ringleaders, and from probation to home confinement for other participants, says Catherine Grant, a spokeswoman for the office.
‘A Small Fraction’
Distance-education programs are especially vulnerable to fraud, because many aid applicants never appear in person. Leaders will recruit a dozen or more "straw" students to apply for aid, then skim off a portion of the money for themselves. Other times, the criminal rings apply using stolen identities.
"Pell runners" use similar tactics but operate independently, hopping from college to college until they exhaust their eligibility for Pell Grants or federal loans. Some shop around for the colleges with the lowest tuition, to maximize their returns.
The most frequent cases of fraud involve low-cost programs at community colleges and for-profit institutions, where the Pell payoff is highest. In the 2013-14 academic year, when the maximum Pell Grant was $5,645 per year, the average community college charged in-state students $3,264, according to the College Board. After tuition, a fraudulent borrower who got the maximum award would get an average of $2,381 back in a "refund" intended by the government for books and other educational expenses.
Colleges refer hundreds of cases of suspected fraud to the inspector general each year, but a majority aren't investigated, largely because of constraints on resources at the Education Department and the Department of Justice. Other cases don’t go to trial, because the losses don’t meet financial thresholds set by U.S. district attorneys’ offices.
In a 2011 report, the inspectoror general acknowledged that "only a small fraction of participants will be prosecuted" and that "only a fraction" of federal student-aid losses will be recovered.
Meanwhile, government investigators fear that many cases are going undetected.
The Front Line
In the 2011 report, the inspector general urged the department to do more to detect and prevent fraud, suggesting nine steps it should take. Congressional Democrats called for "swift action" on the recommendations.
A month after the report was released, the department published a "Dear Colleague" letter, asking colleges for their "continued partnership" in rooting out fraud.
The letter urged colleges to develop ways to track students who use the same Internet Protocol or email address to apply for and participate in online programs, as well as students who live outside the institution’s normal coverage area. It also gave colleges the authority to delay the disbursement of aid to students enrolled in distance-education programs, and to award the aid incrementally rather than all up front.
"Institutions offer the front line of protection and are essential to the department’s efforts to thwart fraud and protect taxpayer dollars," the letter read.
Around the same time, the department created an antifraud task force, led by the top policy official at the Office of Federal Student Aid. The following summer, it updated the list of items that aid administrators must verify for certain applicants, adding high-school completion and student identity to the checklist.
And last year, the department began flagging students with "unusual enrollment histories" for further scrutiny by colleges. If an institution finds, upon reviewing a flagged transcript, that the student hadn’t earned any credits at one or more of the institutions he attended, the college must seek an explanation from him. If the student fails to provide one, the college must deny him aid.
Financial-aid administrators say many of the flagged applicants turn out to be legitimate students who have struggled academically, racking up debt but little or no credit. But some administrators say the additional work is worth it, even if it catches only a few repeat offenders.
"It is not a burden in the effort to prevent fraud and abuse," says Richard Heath, director of financial aid at Anne Arundel Community College. "Even if schools are understaffed, it’s still the right thing to do."
Other aid administrators feel that federal officials have placed too heavy an onus on colleges while falling short of their own responsibilities.
"The department keeps coming up with all these things schools should do to prevent fraud," says Karen McCarthy, a senior policy analyst at the National Association for Student Financial Aid Administrators. Some administrators feel that "perhaps the department needs to be introspective and consider what it could do."
Many colleges say most of the cases they refer to the inspector general’s office go nowhere. Over the past five and a half years, the Apollo Group, one of the largest targets of fraud, has referred 1,413 cases to the office, according to James D. Berg, vice president and chief ethics and compliance officer at the education company. Of those, just 30 have resulted in indictments or prosecutions.
Ms. Grant, the office spokeswoman, responds that the government’s ability to investigate referrals "really depends on the information we receive from the schools." Referrals that aren’t investigated—because of weak information or resource limitations—are forwarded to the Office of Federal Student Aid for "appropriate handling," she says.
This February the inspector general’s office warned in an audit report that federal regulators still weren’t doing enough to guard against fraud in distance education. The report, which focused on distance-education programs at eight colleges from July 1, 2009, to June 30, 2011, found that they had collectively disbursed nearly $222-million to online students who did not earn any credits during a payment period.
During the recent rule-making negotiations, the Education Department proposed that colleges be required to delay the payment of aid if it had "information" that a student or parent was engaged in fraud; had enrolled for the "sole purpose" of receiving student aid; or was not the student for whom the money was intended.
While colleges have long had the authority to withhold payment in cases of suspected fraud, many are reluctant to do so, out of fear that they’ll be sued by the applicant, says Justin Draeger, president of the aid administrators’ association.
During hearings leading up to the rule-making, several college officials asked for clear guidelines on what they should do in cases of suspected, but unproven, fraud.
But some negotiators worried that the proposal would shift the burden of investigating fraud from the department to colleges, leaving them even more vulnerable to lawsuits. In a letter sent to the department on behalf of several college negotiators in April, David Sheridan, director of financial aid at Columbia University’s School of International and Public Affairs, wrote that colleges were concerned "with the legal and professional ramifications of being asked to assume responsibilities typically falling under those of the office of inspector general."
When negotiators met again, later that month, department officials announced that they were "backing off entirely."
"The concerns raised were valid, and frankly, we couldn’t come up with a way to overcome those concerns," John Kolotos, the department’s representative, told panelists.
Mr. Rodriguez, the certified fraud examiner, says there’s a lot more the federal government could be doing to root out fraud. He supports the changes suggested by the inspector general, and says the office should provide colleges and student-loan servicers with earlier information on its investigations.
"Typically, we only hear about a big ring when we read about it in the paper," he says. "We’d like to hear about it sooner."
Timothy Parry, compliance coordinator for program integrity at Liberty University, one of the institutions included in the inspector general’s recent audit, says the department should provide colleges with a way to "securely and legally share detailed potential fraud-case information." And Congress must give government investigators the resources to pursue the growing number of fraud cases that colleges are referring to them, he says.
In the meantime, many for-profit and community colleges are taking steps to thwart fraud on their own. At the Apollo Group, parent company of the University of Phoenix, a four-member "fraud squad" runs regular reports on recurring email, physical, and Internet Protocol addresses and bank accounts, then reviews the results for signs of collusion.
Since late 2008, the squad has flagged 27,600 applicants as suspicious, and stopped roughly three-quarters of them from getting aid. Mr. Berg, the ethics-and-compliance officer, estimates that the company has prevented the disbursement of $155-million in federal aid to fraudulent borrowers. Several other for-profit colleges, he adds, have sent staff members to Apollo to learn its methods.
Rio Salado College, site of the inspector general’s largest fraud-ring bust, in 2009, now dedicates three staff members to verifying students’ identity and records of prior education. The process is time-consuming, but Chris Bustamante, Rio Salado’s president, says it has eliminated 90 percent of the fraud cases.
Coconino Community College, another Arizona institution, withholds student-aid refunds until the third week of classes, but it provides bookstore vouchers so that legitimate students can purchase books before the start of the term. Students who don’t consistently show up during those first three weeks have to wait even longer for their aid, and online students who don’t fully participate in the first week are dropped from classes.
Bob Voytek, director of the college’s office of financial aid and veteran services, says the measures have led to a "significant drop in fraud attempts at the college."
"The delicate balance for us," he says, "is ensuring that the legitimate students are not penalized while we weed out fraudulent students."
Fighting Fraud: Steps Taken, Steps Recommended
In a pair of reports issued in 2011 and this year, the U.S. Education Department's inspector general urged the agency to do more to tackle fraud in distance-education programs. While department officials agreed with nearly all of the recommendations, they have yet to put many into effect. Here are five steps the department has taken, five more the inspector general wants it to take, and five things that colleges are already doing to thwart fraud.
What the department has done:
- Suggested steps colleges can take to root out fraud.
- Allowed colleges to delay and stagger student-aid refunds.
- Created an antifraud task force.
- Expanded the list of items colleges must verify before awarding aid.
- Flagged applicants with "unusual enrollment histories" for additional scrutiny.
What the inspector general wants the department to do:
- Set stricter standards for identity verification.
- Provide more clarity on what constitutes proof of academic engagement.
- Make staggered disbursement mandatory, rather than optional, for online-only students.
- Reduce cost-of-living allowances for online students.
- Collect and analyze data to identify risks to student-aid programs.
What colleges are doing:
- Using technology to identify recurring home and Internet Protocol addresses.
- Withholding aid from students who don’t show up for class.
- Issuing bookstore vouchers in lieu of checks.
- Verifying identity before granting access to online classrooms.
- Sharing their methods with peer institutions.