Student Loan Fraud: It’s Worse Than You Think

More and more people are gaming the federal student loan system.

According to a new report by the Office of the Inspector General, college students who are suspected of engaging in loan fraud increased 82 percent in the last four years from 18,719 students to 34,007. The office identified more than 85,000 recipients who might have participated in student aid fraud rings.

And the price tag for such fraud? About $874 million with the government losing about $187 million.

“These programs are inherently risky because of their complexity, the amount of funds involved, the number of program participants and the characteristics of student populations,” the report's authors wrote in their biannual report to Congress. “Our efforts in this area seek not only to protect federal student aid funds from waste, fraud and abuse, but also to protect the interests of the next generation of our nation's leaders—America's students.”

But how does a person go about defrauding the government? That's the question many in Washington will be asking as a battle brews in Congress to try and avert student loan interest rates from doubling by July 1, 2013.

On Thursday, Democrats on Capitol Hill blocked a bill by Republicans that would tie the student loan rate to a ten-year T-bill rate, which would make it fluid and undoubtedly higher than the current 3.4 percent. Consequently, Republicans blocked the Democrats bill to keep rates at the current rate. Both parties agree that rates should remain low.

As the new OIG report states, 34,007 students defrauding the government is a small number compared to the 54 million students who borrowed loans through federal programs.

“The results of our efforts have led to prison sentences for unscrupulous school officials and others who stole or criminally misused these funds, significant civil fraud actions against entities participating in the Title IV programs, and hundreds of millions of dollars returned to the Federal Government in fines, restitutions, and civil settlements,” the report stated.

In some cases, identity thieves get student loans in other people’s names. Some students would simply rather try to obtain loans instead of an education. In other instances, fraud rings—large, loosely affiliated groups of criminals—are used to obtain federal aid illegally.

Here’s such a case. In Mississippi, 12 residents were indicted in a student aid scheme to attend Pikes Peak Community College in Colorado. A ringleader recruited people to act as “straw” students who submitted false admissions and financial aid applications to the college. Of course, they didn’t intend on attending classes.  

The ringleader received a cut of about $800. The students received more than $52,000 in student loans and grants they were not entitled to receive. Subsequently, the ringleader was sentenced to serve 33 months in prison and ordered to pay nearly $244,000 in restitution. The other participants received sentences ranging from 24 months of probation to 6 months in prison, and they were ordered to pay various restitutions.

Last year, a California man, along with five others, were indicted on charges that they stole more than $250,000 from the Department of Education in a scheme. They used 100 straw students to apply for student aid at vocational and community colleges all around California, according to a news report.

According to the national law firm Morgan and Morgan’s website, individuals who deceive the government to qualify for federal student loans could be in violation of the False Claims Act. It notes that such fraudulent actions include providing “false or misleading student financial information on the Free Application for Federal Student Aid (FAFSA),” “helping students obtain invalid high school diplomas” and “violating Department of Education Regulations.”

As the debate continues in Washington over student loan rates, this new report certainly gives added ammunition to Congressional members who already oppose student loan programs because of potential fraud.