Fighting Financial Aid Fraud in Higher Education

Over the past five years, financial aid fraud in higher education has surged dramatically, costing institutions across the United States upward of $100 million per year as of 2023—compared to less than $10 million annually reported before 2020.^Footnote1

The FBI has investigated numerous cases of financial aid fraud including in Maryland, South Carolina, Alabama, and California—all of which have resulted in significant financial losses. Though widespread statistics are difficult to come by, California's community colleges alone disbursed more than $7.6 million in aid to fraudulent identities over the first three quarters of 2024—up from $4.4 million for the entirety of 2023 and $2.1 million the year before (statewide reporting began in September 2021). It's now suspected that as many as one in four applicants to California's community colleges is fraudulent.^Footnote2

These numbers mirror the striking nationwide increase in identity fraud over a similar period. While identity fraud among American consumers leveled off in 2023, specific categories such as synthetic identity fraud have reached record levels, growing by 38 percent between 2022 and 2023 in certain sectors.^Footnote3

The Vulnerability of Legacy Systems and Outdated Processes

While financial aid fraud has long been a challenge, it grew in both scale and sophistication during and after the COVID-19 pandemic. The rapid digital transformation across sectors during this period—higher education included—exposed vulnerabilities as institutions rushed to adapt online enrollment processes for remote learning. At the same time, nearly $40 billion in federal stimulus dollars dedicated to emergency student aid created a prime opportunity for exploitation.

This perfect storm has caused financial aid fraud to skyrocket. In 2022, for example, a single perpetrator in Texas was able to impersonate over thirty different students, ultimately stealing nearly $600,000 of federal funds.^Footnote4 That's because legacy systems at colleges and universities typically lack robust identity verification capabilities. Instead, they rely on outdated processes involving manual checks, which are ill-equipped to detect the highly sophisticated methods fraudsters use today.

Here's how financial aid fraud works:

1. Fraudsters leverage stolen or synthetic identities to easily bypass existing systems and processes and enroll in colleges or universities. Once enrolled in the minimum required credit hours, they can apply for financial aid. They then remain registered just long enough to secure the financial aid payments.
2. These payments first cover the cost of their tuition, which—particularly in the case of community colleges—can be minimal or even waived. The remaining aid is typically deposited directly into fraudsters' bank accounts, with the intention that it be used to cover living costs and reduce their need to work.
3. Most of the aid in question comes from federal funds, typically in the form of Pell Grants, whose disbursement is controlled by the school and intended for low-income students.
4. Once the money is received, the fraudsters (often referred to as "Pell runners" or "ghost students") quickly disappear. A single case can cost an institution as much as $7,400.^Footnote5

The U.S. Department of Education requires institutions to take adequate measures to prevent fraud and abuse, including verifying student identity, maintaining accurate records, reporting suspected fraud, and ensuring aid is tied to enrollment and participation. Institutions can be held accountable for noncompliance through fines, loss of federal funding eligibility, or reputational damage.^Footnote6

In addition, every fraudulent student diverts aid and potentially a classroom slot that could have otherwise gone to a legitimate student. Likewise, fraud creates unnecessary administrative burdens for staff, who must spend considerable time manually verifying identities on one end and additional time and resources pursuing perpetrators on the other.

Community colleges are especially vulnerable, as they typically operate on an open enrollment basis, accepting all applicants who meet admission criteria.

A Case Study for Success

Financial aid fraud is another form of financial fraud, which the financial services industry—an equally complex sector—has been battling head-on with advanced tools for decades, often on an even larger scale. These sophisticated solutions offer a proven blueprint to combat fraud effectively.

Veridian Credit Union, for example, partnered with Plaid to implement a sophisticated digital solution that verifies the authenticity of applicants' identities while lowering application friction.

The impact on Veridian has been notable:

• Requests for additional documents decreased by 25 percent.
• Declined applications (and associated manual reviews) went down 20 percent.
• The company saved countless staff hours, as the average manual review takes fifteen to twenty minutes per application.

Equally important, legitimate customers are now experiencing shorter application times and an easier application process.

A Multilayered Approach to Fraud

Plaid is now partnering with colleges and universities to provide them with the same sophisticated fraud prevention used in the financial services industry. Plaid Identity Verification (IDV) takes a 360-degree approach, acting as a front-line fraud barrier for institutions by stopping fraudsters at the very start of the chain: enrollment. The technology is seamless and designed to minimize friction for legitimate students while stopping fraudsters in their tracks. Plaid IDV performs the following functions in as little as ten seconds:

• Verifies an applicant's identity information against regulated data sources (including financial institutions and credit reporting agencies with reported bank, credit card, loan, property, and utility data)
• Authenticates an applicant's global ID documents (covering over 16,000 ID types and two hundred countries)
• Confirms an applicant's liveness (i.e., that the person is present and that their face matches the image on the provided ID)
• Analyzes hundreds of behavioral signals (i.e., usage consistent with bad actors, fraud rings, and bots)
• Verifies email and phone number legitimacy (i.e., whether new, disposable, registered with external accounts, or compromised in breaches)
• Analyzes device and network risks (e.g., the use of a VPM or Tor, an IP geolocation and time zone mismatch, incognito browsers, or repeat sessions)

In addition to IDV, Plaid helps prevent fraud through Beacon, an anti-fraud network that enables companies and institutions to mount a collaborative defense and prevent repeat activity by reporting fraudulent actors. The network's unique fraud indicators and other insights help institutions stop fraud before it happens.

Finally, Plaid simplifies and secures the confirmation of financial aid disbursements through bank account verification, ensuring that post-tuition funds are sent to the enrolled students' bank accounts and that the aid matches the information on the receiving bank account. This capability—often seen in the financial sector—is being leveraged for the first time in education and offers another way to reduce the risk of misappropriated funds significantly.

Restoring Trust

Ultimately, the cost of financial aid fraud goes beyond its immediate monetary implications. Successful fraudsters divert resources from students while chipping away at the public's trust in the educational institutions designed to serve their communities and the tax-funded government programs that help fund them.

By partnering with Plaid, colleges and universities can begin to fight technology with technology—breaking the fraud chain while facilitating access to financial assistance for the students who truly need it.

Plaid is a global data network that powers the tools millions of people rely on to live a healthier financial life. Their ambition is to facilitate a more inclusive, competitive, and mutually beneficial financial system by simplifying payments, powering cash flow lending, and leading the fight against fraud. Plaid works with thousands of companies, including fintechs like Venmo and SoFi, several Fortune 500, and many of the largest banks, to empower people with more choice and control over how they manage their money. Headquartered in San Francisco, Plaid's network spans over 12,000 institutions across the United States, Canada, the United Kingdom, and Europe.

To learn more, reach out to Plaid's higher education solutions team at [email protected] and [email protected].

Notes

1. Sean Salai, "Federal College Aid Scams Soaring, 'Easy' to Get Money Online with Phony Student Applications," The Washington Times, June 21, 2023. Jump back to footnote 1 in the text.↩
2. Michael Burke, "Financial Aid Fraud Is Growing at California's Community Colleges," EdSource, November 13, 2024; Adam Echelman, "'Getting Significantly Worse': California Community Colleges Are Losing Millions to Financial Aid Fraud," CalMatters, April 1, 2024. Jump back to footnote 2 in the text.↩
3. Christina Ianzito, "Americans Reported Losing a Record $10 Billion to Scams and Frauds in 2023," AARP, February 9, 2024; "Synthetic Identity Fraud: How to Detect and Prevent It," Plaid, May 1, 2024. Jump back to footnote 3 in the text.↩
4. United States Attorney's Office, Southern District of Texas, "Local Man Indicted for Student Financial Aid Fraud," press release, October 3, 2022. Jump back to footnote 4 in the text.↩
5. Echelman, "'Getting Significantly Worse,'" 2024. Jump back to footnote 5 in the text.↩
6. U.S. Department of Education Office of Postsecondary Education, "Subpart G—Fine, Limitation, Suspension and Termination Proceedings," Title 34 of the Code of Federal Regulations, Education. Jump back to footnote 6 in the text.↩