Student-Aid Scams Targeted by Schools, Government; a growing number of recipients—acting alone or as part of organized crime rings—are pocketing federal loans and grants without any intent of going to school

Updated June 23, 2013, 9:25 p.m. ET

Student-Aid Scams Targeted by Schools, Government

By JOSH MITCHELL

Federal officials are cracking down on fraud in student-aid programs, responding to evidence that a growing number of recipients—acting alone or as part of organized crime rings—are pocketing federal loans and grants without any intent of going to school.

The Education Department in January began using a database to flag applicants for federal Pell grants who have an “unusual enrollment history”—having received aid for three or more schools within a year, primarily. The department sends the names to colleges and universities, which then ask applicants to provide prior transcripts and other documents. A school can deny a grant or loan if it deems the applicant’s responses to be unsatisfactory.Since January, the agency said it has flagged 126,000 applicants, about 1% of all those seeking aid for the 2013-2014 school year.

“What we find are very poor students academically that are borrowing to the max, getting the maximum in their Pell grant and just going from school to school,” said Rich Heath, director of financial aid at Anne Arundel Community College, in Maryland, where the new system has flagged 108 aid applications out of about 8,000 total.

Roughly $829 million in Pell grants in the fiscal year that ended last September were “improper payments,” which includes fraud and disbursements due to clerical errors, the Education Department reported last year. That was down from the previous two years, but up 86% from 2007. Improper payments through the federal student-loan program more than doubled last year from the year before to $614 million.

More than 34,000 participants in crime rings improperly received federal student aid last year, up 82% from 2009, the department’s inspector general estimated this month.

Justin Draeger, president of the National Association of Student Financial Aid Administrators, said while schools are trying to curb fraud, they strive to get aid to deserving students. “Schools are constantly trying to find the right balance here.”

Administrators at several large community colleges say they are increasingly denying aid to those they believe are abusing the system. Northern Virginia Community College, for example, has begun rejecting aid applications from students who are near the maximum limit they can borrow under federal programs and haven’t explained how they plan to pay for the remainder of their schooling beyond a semester or two.

Joan Zanders, director of financial aid at Northern Virginia, said most aid recipients use the funds properly. But she has seen an increase in suspicious aid applications in recent years.

“We started seeing student borrowing that was just over the top with no explanation for why,” Ms. Zanders said. “We have individuals that have told me, ‘I spent all this money on graduate school. I can’t get a job. I’m living in somebody’s basement. I can’t afford to live, I need the money.’ It’s not so much about the education, it’s the money.”

Federal Pell grants don’t have to be repaid and are designed to go to the neediest students. The maximum annual award is $5,550. The government’s most popular borrowing program, Stafford loans, allow undergraduates to borrow up to $57,500 over their lifetime and graduate students up to $138,500.

Most federal student aid requires no credit check and comes with few restrictions on how the money is spent. Schools get the first cut of the grants and loans to cover tuition, then make checks to students for the remaining amount to pay for books, transportation expenses, rent and other living expenses for the semester.

Community colleges are a chief target for fraud because they often have open enrollment, meaning anyone can attend regardless of their academic background, and low tuition. The lower the tuition, the more money is left over from a grant or loan to cover living expenses.

At Henry Ford Community College, in Dearborn, Mich., for example, a full-time, independent student can receive up to roughly $11,000 in aid to cover living expenses over two semesters, said Stephanie Latzke, the school’s assistant director of financial aid.

Of the 17,575 applicants for student aid at Henry Ford this year, 638 have been flagged for unusual enrollment, a school spokesman said. Ms. Latzke said most of those applicants have responded to requests for more information.

The schools have become stricter since 2010 federal regulations expanded the types of instances in which they are on the hook for aid to students who fail to show up to a class. Previously, the federal government absorbed many of the losses. Henry Ford, for instance, reimbursed the government for $4.1 million in federal aid last year for such cases. Schools also risk losing federal aid if a high proportion of their former students default on federal loans.

Federal officials say the Internet has helped fuel student aid fraud. At community colleges and online schools, borrowers can often obtain tens of thousands of dollars in aid by applying via the Web, without ever stepping foot on campus or talking to a school official.