Pell Grant Fraud Awareness: White-Collar Crime Challenges
By Jeremy Green and James Densley, Ph.D.
The Federal Pell Grant Program promotes access to postsecondary education by providing need-based financial aid to 9.5 million low-income students across the United States at a cost of $34 billion per annum.1 In 2010 improper payments in the Pell Grant Program were estimated to be $1 billion, or 3.12 percent of total program outlays.2 While incorrect self-reporting of an applicant’s income is the primary cause of improper payments, this research showed that an absence of capable guardianship makes the program a target for fraud perpetrated by motivated offenders.3
The authors interviewed financial aid administrators at several Midwest state colleges and universities who inferred that white-collar crime is moving out of the boardroom and into the classroom as a result of higher education reform. The challenge for law enforcement is that in this context, the reasoning criminal can be almost anyone who has specialized access to personal information, from a self-employed federal student aid consultant to the owner of a chain of proprietary schools.4 Historically, understanding Pell Grant fraud has fallen to educationalists, rather than criminologists.5 The authors argue that a criminological perspective better accounts for this rising problem and provides tangible solutions for it.
Like other white-collar crimes, Pell Grant fraud is a specialized-access offense. This means that certain professions and organizations provide offenders with practical routes to their targets.6 Low-income undergraduates, for example, have specialized access to the program. “Pell runners” use their access to register for low-cost classes and apply for grants only to withdraw upon receipt of tuition reimbursement.7 Typically they move from one college to another until they reach their 12-semester limit on federal student aid.
By contrast, fraud rings use fake students or identity theft to commit their crimes.8 In one case a Chicago-based street gang allegedly recruited new members—who were not, nor did they intend to become, active students—to fraudulently apply for and receive student financial aid through several Midwest state colleges. In another case an Arizona student used both fictitious and valid information, such as birth dates, social security numbers, and driver’s license numbers, along with tax and wage documents, high school diplomas, and financial aid applications to create an extensive network of phony students and to defraud the federal government of $539,000.9
College employees and financial aid preparers have specialized access to students’ personal information that could be used to defraud the government without the stated applicant’s knowledge. A former college president and financial aid director in Atlanta used the names of former students and individuals who never attended the college to fraudulently obtain $5 million in grants.10 A South Carolina inmate who worked in the prison’s education department gathered the personal information of fellow prisoners to illegally file for $467,500 in federal student aid.11 In another case, two former financial aid advisers and a tax preparation business operator in Chicago were charged with filing fake tax returns to obtain nearly $1.5 million in financial aid for 75 students over a 2-year period.12
Dr. Densley is an assistant professor in the School of Law Enforcement and Criminal Justice, Metropolitan State University, Brooklyn Park, Minnesota.
In a landmark study, it was argued that for crime to occur, three essential ingredients—motivated offenders, suitable targets, and an absence of capable guardians—must converge.13 Criminologists have applied this “routine activities theory” to explain a variety of predatory crimes, but never with Pell Grant fraud, even though all three factors are present.
Community colleges constitute suitable targets for Pell runners and fraud rings for many reasons. First, the average community college charges $2,713 per year for tuition, but in 2011 and 2012 students could receive up to $5,550 per year in Pell Grant aid.14 Low-credit courses and low tuition rates provide substantial excess aid.15 A $2,000 refund check meant for books and other personal expenses makes a tidy profit for a motivated offender.
Second, community colleges typically are open-access institutions designed to educate nontraditional students. With minimal academic requirements and expedited rolling admissions, community colleges work extensively with transfer students whose academic histories often are difficult to track. Fraud investigation is a time-consuming process. Some financial aid departments process 10,000 applicants per semester. By the time a college even identifies the crime, the offender typically has moved on to another college or city. With neither the jurisdiction nor the resources to properly investigate Pell Grant fraud, colleges refer cases to the U.S. Department of Education (DOE). However, federal oversight is lacking due to the volume of referrals, limited resources, and other external confines; hence, many fraud rings are not investigated thoroughly.16
In 2005 Congress eliminated the 50 percent rule, which mandated that colleges could not receive federal aid funding if more than half of their students were enrolled in online classes. Since then the availability of e-learning courses and degree programs has grown significantly.17 Online students, usually working adults, are eligible for the same federal aid to cover living expenses as students who attend on-campus programs. Reduced seat-time and increased distance-learning courses enable students to attend college and obtain Pell Grants and other student aid without physically being in a classroom.
The impersonal nature of higher education today reflects a lack of capable guardianship—students often are gone before faculty knew they were there. Online courses designed to support an indefinite, unknowable number of participants, combined with the bureaucratic levels separating faculty from college finance offices, adds to the problem and presents motivated offenders with viable criminal opportunities.
Motivated offenders always will exist. According to routine-activities theory, fraud prevention is predicated on hardening soft targets and establishing capable guardians. In the 1970s Congress expressed concern about the use of Pell Grant money for noneducational expenses. It was not until the 1994 conviction of a University of Miami academic advising coordinator who defrauded the program of $174,000 on behalf of 91 athletes that the government took the issue seriously.18 The result was the College Scholarship Fraud Prevention Act of 2000 that legislates a maximum of 5 years in prison or fines of up to $20,000 for perpetrators of Pell Grant fraud. To increase the certainty and severity of punishment—two fundamental deterrence principals—this law often is used in conjunction with other federal statutes. Most financial aid fraud uses the U.S. Postal Service, and federal law—Mail Fraud, Title 18, Section 63, U.S. Code—carries a maximum penalty of 20 years in prison or fines of up to $250,000.
To strengthen the Pell Grant program against motivated offenders, the federal government recently began withholding aid from persons with drug possessions, criminal records, and previously defaulted student loans; reducing eligibility from 18 to 12 semesters; and cutting the maximum liability from $30,000 to $23,000 per year per student.19 The DOE initiated a data program that mines financial aid accounting records from colleges and searches for risk factors, such as invalid social security numbers.
To deter Pell runners and fraud rings, many colleges require students to participate in on-campus orientation sessions or education-related activities during the first few weeks of classes and do not disburse financial aid until faculty members have validated attendance and class participation.20 However, mandating faculty to assign more coursework early in the semester, centrally report class turnout, and use online reporting and grading software can be challenging. It encroaches upon academic freedom. Many faculty members understand the importance of reporting attendance; however, it adds an administrative process that increases their already-demanding academic responsibilities. As education providers compete for diminishing dollars, colleges and universities are hesitant to report fraud cases or change policies and procedures related to federal student aid. Schools do not want the stigma of reporting federal student aid fraud, and faculty members worried about enrollment figures do not want to report students who do not come to class. These numbers often dictate whether a class will be taught again.
A compromise might be to disburse financial aid in segments throughout the semester and only to students who attend classes and demonstrate academic progress. The first disbursement would pay for tuition, while subsequent payments would cover incidental expenses. Federal aid would become a quid-pro-quo for academic improvement. More capable guardianship earlier in the admissions process also could help. Stricter admission or academic progress requirements, such as allowing more direct access to financial information by the academic program, could weed out some motivated offenders.21
Pell Grant fraud is widespread. Technological advances and changes to the administration of higher education present new opportunities for criminals and greater challenges for law enforcement. Federal law is reactive, but colleges and universities must be proactive by extending orientation periods, mandating in-person orientations, assigning more coursework during the first weeks of class, reporting nonattending students, and delaying or compartmentalizing financial aid disbursements to help eliminate this white-collar crime.
Additional research is necessary to determine what works and what does not because any changes to deter and punish motivated offenders could affect legitimate Pell Grant recipients.22 Unfortunately, Pell runners and fraud rings deprive many individuals, including themselves, of the benefits of a college education. They trade thousands of dollars in additional lifetime earnings for a quick buck.23
Raising awareness of this complex white-collar crime is the first step in alleviating the problem. The authors hope it encourages informed dialogue by members of law enforcement, educators, and university administrators. Without sufficient guardianship, colleges and universities remain accessible targets for motivated fraud offenders.
For additional information contact Mr. Green at firstname.lastname@example.org or Dr. Densley at email@example.com.