3 ways tech-enabled financial aid fraud costs colleges – and how to curb it

Commentary: The technology and systems that make online education accessible to students also create opportunities for financial aid fraud.

Jarrod Morgan
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Jarrod Morgan Founder and Chief Strategy Officer

Jarrod Morgan is the founder and chief strategy officer of ProctorU and former director of technology ...

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Online learning has opened the door to students who want more flexibility in their education. But the technology and systems that make online education accessible to students also make transactions between students and institutions more complex.

That is creating opportunities for scammers — and a challenge colleges and universities are reluctant to discuss: financial aid fraud.

However, it's an issue that is costing colleges and universities millions of dollars, hundreds of hours of time and their reputations in some cases. And more institutions are susceptible to it than they might realize.

Here is a look at three ways financial aid fraud is costing institutions:

1. Time Costs

Financial aid fraud rings have learned to attack an institution by stealing Title IV funding. These rings typically use straw students or stolen identities when applying for federal student aid and enrolling in a college. Often the college or university does not know it is a victim of this fraud until long after it has occurred, making the crime and the stolen federal dollars hard to track.

Additionally, these fraud rings often steal the identities of individuals, including actual students, which can affect victims’ credit ratings when colleges, universities and the Department of Education seek repayment. Online programs are especially at risk because they limit or remove the opportunity to connect with students face to face.

Identifying fraud rings and documenting activity to prove enrolled students are engaged in illegal activities can take a great deal of time. Fraud rings often target online programs because they do not require in-person registration, making the creation of a straw student much easier.

When enrolling at an institution, perpetrators may submit forged transcripts, use fake addresses or falsify other documents. These falsified documents often have subtle patterns that are only noticeable to a trained eye, which makes it difficult for personnel to detect fraud because the documents are often sent to various departments across campus. Without a designated person or centralized processes to review these documents, institutions can get lost in a web of paper.

2. Financial costs

According to a report on online education programs from the U.S. Department of Education Office of Inspector General, $187 million in federal student aid loans were lost between 2009 and 2012 alone through this type of criminal activity. During this time, Title IV fraud increased 82 percent.

The report estimates that of the students receiving Title IV disbursements from 2009 to 2012, about 85,000 students may have participated in financial aid fraud rings. The report concluded as much as $874 million – approximately $218 million a year – was at risk of fraudulent activity.

Often times, the perpetrators of these fraud rings exploit outdated public and campus policies, by falsifying identities or circumnavigating loose or non-existent verification processes, many of which were not intended for online programs.

One of the most common policies financial aid fraud rings take advantage of is how financial aid is paid out.

Financial aid is typically earned in portions. At first students earn financial aid proportional to the length of the payment period (typically the course length or semester). Complete 15 percent of a course, earn 15 percent of the total financial aid reward. Complete 45 percent of a course, earn 45 percent of the aid. This goes on up until a student completes 61 percent of the course, at which point he or she can then receive 100 percent of Title IV aid allocated. This is the point financial aid fraud rings exploit because it means a student – fake or otherwise – needs to complete less than two-thirds of a course to receive the full available aid.

When an individual is caught, they are very unlikely to cooperate with the Department of Education in returning Title IV funding, making it difficult and cumbersome for the funds disbursed to be returned. In these cases, the financial burden can fall on the institution, meaning a college or university absorbs the cost of the crime.

3. Reputational costs

For colleges and universities brand integrity is essential for recruiting students, and financial aid fraud can hit some institutions hard – especially those with successful online programs. The damage among their community, policy makers and boards of trustees can be significant if financial aid fraud goes undetected and unaddressed.

To protect themselves and their students, institutions must understand financial aid fraud and how to protect themselves.

Using Technology to Prevent Financial Aid Fraud

While in some ways technology created the opportunity for financial aid fraud, it can also be used to combat and prevent it. Video can be a powerful technology in this way. Some institutions with online programs are using visual verification via webcam to ensure students are who they say they are.

Other institutions are taking it one step further and confirming students’ identities by asking them to answer questions about themselves found in public records, while being monitored by a proctor. A third approach institutions are taking is keystroke biometrics and facial recognition software to ensure the same student is logging in to his or her course every time.

Using technology in these ways, reviewing and updating existing policies, establishing centralized protocols for identity verification at the point of enrollment, and establishing identity authentication processes for individual online classes can all help protect colleges and universities and keep their reputations intact, as well as foster a positive learning environment.

Jarrod Morgan is the founder and chief strategy officer of ProctorU and former director of technology at Andrew Jackson University, where he began working on solutions to address common online academic integrity challenges.

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