Student Aid Fraud Skyrockets With Distance Learning

NEW YORK (MainStreet) — Distance learning may already be the next big thing, but the Department of Education (ED) was trying to gauge the risk of student aid fraud when it sent a team from its Office of Inspector General (OIG) to audit the disbursement of student aid for distance learning on campuses. The audit covered 2009 to 2011.

The Final Audit Report found that distance education, where students attend virtual classes on a computer, was more vulnerable to student aid fraud than traditional programs held in brick-and-mortar classrooms.

The OIG looked at eight schools: two four-year colleges (Penn State, Kent State) two two-year colleges (Ivy Tech Community College and Valencia Community College), two private non-profits (Liberty University, Western Governors University) and two it defined as proprietary—but which are also well-known as for-profits: the University of Phoenix and ITT.

The OIG deemed five of the eight schools to be at low risk, but found a fraud ring at one of those. Of the remaining three, fraud rings were found at two. The OIG did not name any of the schools victimized by fraudsters.

The OIG found that current requirements to verify the identities of people getting federal loans and work-study aid who are enrolled in distance learning are not sufficient to mitigate fraud and risk. Fraud rings typically enroll "smurfs" who have no intention of completing their programs, staying long enough to get their money before dropping out. Distance learning, which allows students to be unseen and unheard, exacerbates the risk.

One of the OIG's most disturbing findings was how often taxpayers got no bang for their buck at all. "The eight schools disbursed nearly $222 million to more than 42,000 distance education students who did not earn any credits during a payment period," the report said. "Collecting and analyzing sufficient and appropriate data would help the department address risks, proactively adapt policies to address those risks, and better target its school compliance monitoring."

Identifying aid recipients went to the top of report's recommendations — while noting that what currently exists to accomplish this is inadequate. "The Department issued regulations and provided guidance to accrediting agencies and schools to address distance education issues associated with verification of student identity, attendance, and fraud," the report said. "However, the regulations and guidance as they relate to verifying the identity of distance education students and the definition of attendance do not sufficiently mitigate the risks of fraud, abuse, and noncompliance."

The account login two-step that is the staple of e-commerce —- you provide a login and password -- was found to be inadequate when it comes to identifying the person on the other end of the transaction trying to get access to an account.

"A login and passcode ensure only that someone logging in to a course is using the same login and passcode assigned to the person who enrolled," the OIG said. "Without effective enrollment processes at a school, a login and passcode do not ensure that the person is enrolling under a valid name and intending to obtain an education."

If the ED is the bank of first resort and a college that issues logins and passcodes is the last mile in the student loan supply chain, then the industry may really be facing a Know Your Customer (KYC) problem — the kind that the banking, securities, insurance and money transfer industries have struggled with since 9/11, over a decade ago. It's taken the financial services industry almost that long to get a handle on this problem. Colleges and universities with funds to disperse for distance learning seem to be starting from scratch.

The OIG said fraud could be reduced if smaller aid disbursements were made over a longer period of time, making them less attractive to fraudsters, forcing them to remain enrolled for several months before they could get all their money.

While the report stopped short of casting doubt of the efficacy of distance learning, it recommends that colleges and universities re-examine the cost of attendance for students in distance education programs to ensure that Title IV funds cover only educational expenses. Such a solution could be included in the Higher Education Act, which is up for reauthorization this year.

--Written by John Sandman for MainStreet

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