Financial Aid Fraud
If you’re thinking about committing fraud on a financial aid application, don’t. You will get caught. Not only will you ruin your own future, but you will also ruin your children’s future. You will also be depriving deserving students from the financial aid funds they need to pay for college.
Some of the most common types of financial aid fraud include underreporting income and assets, overstating household size and number in college, sham legal guardianships, fake marriages and bogus claims of state residency.
Financial aid fraud is not a victimless crime. Financial aid fraud involves more than just stealing financial aid funds from the federal and state governments and colleges and universities. Financial aid fraud deprives genuinely needy students from the financial aid funds they need to afford college, since many financial aid programs have limited funds. Efforts to prevent financial aid fraud may also make it more difficult for these students to demonstrate their eligibility.
Underreporting Income and Assets
The introduction of the IRS Data Retrieval Tool in 2009-2010 significantly reduced the underreporting of income on the Free Application for Federal Student Aid (FAFSA). The IRS Data Retrieval Tool transfers income and tax information from federal income tax returns to the FAFSA. Families are much less likely to lie to the IRS than to the U.S. Department of Education.
If the applicant does not use the IRS Data Retrieval Tool, many colleges will require them to submit an IRS tax return transcript, IRS tax account transcript or IRS verification of non-filing letter.
There are also dozens of red flags that suggest underreporting of income and assets. For example, if no alimony or child support is reported on the FAFSA when the parents are divorced or separated. Unreported and underreported assets can be identified when the interest and dividends reported on a federal income tax return is inconsistent with the assets reported on the FAFSA.
Overstating Household Size and Number in College
Increasing household size typically yields an additional $1,000 to $2,000 in financial aid.
The number of children in household size who are enrolled in college on at least a half-time basis, however, can have a much bigger impact on eligibility for need-based financial aid. The parent contribution portion of the expected family contribution (EFC) is divided by the number of children in college. Increasing the number of children in college from one to two is roughly the equivalent of dividing parent income in half.
Children do not have to live with the family to count in household size, so long as the parents provide more than half their support. Other dependents, however, must live with the family and receive at least half their support from the parents.
The most common cases involving this type of financial aid fraud include applicants who count pets in household size, parents with PhDs going back to college to get an Associate’s degree, and wealthy families counting a live-in nanny or butler as a member of the family. Fluffy and Fido may seem like a member of the family, but they don’t count as such on the FAFSA.
Colleges will require a copy of a paid bursar bill and will verify the registration with the college.
Sham Legal Guardianships
In a recent scam, ProPublica and the Wall Street Journal reported that dozens of wealthy parents from the Chicago suburbs (and perhaps thousands nationwide) put their children in sham legal guardianships in order to qualify them for more financial aid as independent students.
Independent students are not required to report parent information on the FAFSA. The FAFSA is used to award financial aid from the federal government, state governments and most colleges and universities.
These families stole Illinois state need-based grants, called MAP grants, from genuinely low-income students. The MAP grants are awarded on a first-come, first-served basis until the funding is depleted. When a parent sets up a sham legal guardianship, it deprives needy students of the MAP grants.
The families also fraudulently received other federal, state and college aid funds.
The parents claim that they did not violate any laws, but instead exploited a legal loophole. This is not accurate.
- The families failed to disclose all material facts to the court when seeking a legal guardianship. That’s criminal contempt of court.
- The families committed perjury. Their applications for legal guardianship stated that the legal guardian would be able to “provide … financial support and opportunities to the minor that her parents could not otherwise provide.” But, the financial support would be provided by the government and the colleges, not the legal guardians.
- The students lied on the FAFSA. When a student is independent, the student must report any cash and in-kind support they receive as untaxed income. They failed to report that they were still living with their parents, remained on their parents’ insurance and continued to receive financial support from their parents or other relatives. The parents also continued to pay private school tuition for their children.
It is shameful that some parents would stoop this low to qualify for more financial aid than they deserve.
When a student gets married, the student becomes an independent student. Married students report their spouse’s income and assets on the FAFSA instead of their parent’s income and assets.
In some circumstances this can increase the student’s eligibility for need-based financial aid. An independent student without dependents other than a spouse is still subject to the 50% assessment rate for income and the 20% asset conversion rate for dependent students, as opposed to the lower rates that apply to parent income and assets. Parents also have a higher state and other tax allowance and a higher income protection allowance, sheltering more of parent income. But, if the spouse’s income and assets are much lower than the parents, this may lead to a lower EFC.
Based on data from the 2015-2016 National Postsecondary Student Aid Study (NPSAS), 0.7% of undergraduate students are married and not independent for some other reason, such as age, children, military service, orphan status, legal guardianship or unaccompanied homeless youth. Most of these marriages are genuine, with more than 90% occurring during the junior and senior years in college and when the students are age 21-23.
Most colleges require a copy of the marriage certificate if the student’s marital status changes from unmarried to married. College financial aid administrators will also question the status if the student and spouse are not living together. Fake marriages are often reported by other students, sometimes even by a disgruntled spouse.
Fake marriages can also backfire. When the couple gets divorced or seeks to have the marriage annulled, sometimes the ex-spouse will demand alimony or other financial compensation.
Bogus Claims of State Residency
Public colleges charge lower tuition rates to state residents than to out-of-state students. The savings are about $10,700 on average, based on 2017 IPEDS data, and can be as much as $30,000. In-state tuition and fees are typically one third to one half that of out-of-state tuition and fees, and 44% on average.
There are legitimate ways of qualifying for in-state tuition, such as tuition reciprocity agreements between adjacent states and regional exchange programs.
But, the potential savings tempts some families into claiming bogus state residency.
If the student is a dependent student, the parent must also be a state resident or there must be a compelling reason for the student to be living with a relative in the state. If the student is independent, just the student must reside in-state. So, it is not uncommon to see bogus state residency claims coupled with fake attempts to demonstrate independent student status, such as emancipated minor status.
To qualify for in-state tuition, the student must present a preponderance of evidence that they became a state resident for a reason other than lower in-state tuition rates. This includes demonstrating strong ties to the state beyond just living in the state, such as having a job in the state, graduating from high school in the state, opening a bank account at a local bank, registering a car in the state and obtaining a state driver’s license, and filing federal and state income tax returns with a state address.
It is not sufficient to rent a mailing address for 12 months prior to enrollment and to file a Declaration of Domicile form.
Pell runners apply for financial aid using someone else’s identity, such as the name, date of birth and Social Security Number (SSN) of incarcerated individuals, young children and nursing home residents.
Most often this form of financial aid fraud involves fraud rings that submit dozens or even hundreds of fake FAFSAs.
This type of financial aid fraud is most prevalent at low-cost colleges, such as community colleges, where the financial aid refund after subtracting tuition is maximal. It is also common at low-cost online colleges, where the ringleader can participate in class on behalf of the fake students. This maximizes the amount of financial aid the student will receive.
You Will Get Caught
College financial aid administrators have much more experience in rooting out financial aid fraud than families have in perpetrating it.
There are hundreds of telltale signs that colleges use to detect financial aid fraud. For example, a legal guardianship will be questioned if it was established just a few months before the child turned age 18 or if the student continues to live with their parents.
Often, a student will blab to a college roommate or other peers, who will then report them to the college financial aid office. School counselors will alert college financial aid administrators when something seems amiss. Students and parents will often make mistakes when communicating with the financial aid office.
Database matches between various federal agencies can also help identify financial aid fraud.
Penalties for Committing Financial Aid Fraud
The Higher Education Act of 1965 provides severe penalties for financial aid fraud, including fines of up to $20,000 and up to 5 years in prison.
Financial aid fraud includes making false and misleading statements on the FAFSA. Lying on the FAFSA is also considered perjury.
The College Scholarship Fraud Prevention Act of 2000 provides for enhanced penalties for fraud and misrepresentation involving scholarships, grants, loans, tuition discounts or other financial aid.
To the extent that the FAFSA was submitted by postal mail or by computer networks, the applicant and the applicant’s parents may be subject to penalties for mail fraud and wire fraud. Mail fraud and wire fraud are felonies that can result in fines of up to $1 million and up to 30 years in prison.
Financial aid fraud involving identity theft may lead to additional fines and prison time, depending on applicable federal, state and local laws.
The family will also be required to repay all fraudulently obtained student financial aid.
Many colleges have student codes of conduct which can result in an offer of admission being revoked, the student being expelled and degrees being rescinded.
Paid preparers and consultants are subject to the same penalties as the applicant for “purposely giving false or misleading information” in the application for financial aid.
How to Report Financial Aid Fraud
Financial aid fraud can be reported to a financial aid administrator at the student’s college. The financial aid administrator will want to see documentation or other evidence of the fraud.
If financial aid fraud involves federal student financial aid, call the Office of the Inspector General (OIG) at the U.S. Department of Education at 1-800-MIS-USED (1-800-647-8733). Fraud can also be reported by filing a complaint online.
Financial aid fraud can also be reported to the Federal Trade Commission (FTC), Consumer Financial Protection Bureau (CFPB), state attorneys general and through the federal student aid feedback system.
If the financial aid fraud involves identity theft, also report it through IdentityTheft.gov.
A good place to start