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April 2013 - Volume 19, Number 2

   

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Pell-Running: Taxpayers Lose $1 Billion or More a Year to Fraudulent Use of Pell Grants

By Duke Cheston
The John W. Pope Center for Higher Education Policy

 

Not long ago at a North Carolina community college, there always seemed to be fewer cars in the parking lot the week after Pell grant checks were sent out. And one instructor noticed that some students weren’t taking the final in her class. Why? They hadn’t studied and knew they were going to fail — but they had received their checks.

 

Such “students” are called “Pell runners.” They have figured out how to profit from a federal program meant to make higher education more affordable, and their fraud actually drives up tuition for honest students. While times have changed at the school mentioned above, fraud continues at many.

 

The Pell Grant Program, intended to help lower-income students afford college, began in 1972. In 2003, the U.S. General Accounting Office (GAO) estimated that Pell grant fraud accounted for about $300 million in grants per year — about 3 percent of total money handed out.

 

A decade later, the program has more than tripled in scope (roughly doubling between 2008 and 2010), and fraud seems to be as bad as ever. One expert, Mark Kantrowitz of FinAid.org, believes that Pell-grant fraud still runs at about 3.6 percent or more than $1 billion a year. The Obama administration reported that “improper payments” — money distributed erroneously due either to fraud or mistakes — totaled 2.7 percent in 2011. Kantrowitz’s higher number is based on the number of students who receive grants but never obtain degrees.

 

There are two primary ways federal student aid is abused. One is the Pell runner. Students obtain grants — up to $5,500, receiving directly whatever money is left over after tuition. Then they drop out without finishing any courses.

 

Federal law makes this scam possible. Grantees are allowed to attend school for 12 semesters (six years) before they lose eligibility. There are no academic requirements; the only requirements are based on income and the cost of college. And there is no graduation requirement.

 

The other form of abuse is more complex. It is designed to make off with Pell grants and federal student loans as well. Criminals form rings, in which the leader recruits “straw students” who apply for the grants and loans, then shares the haul with them.

 

Such fraud has become easier to commit due to the rise of online education, since students don’t have to appear in person. In 2011, the Education Department reported a “dramatic” increase in financial aid scams involving online education, opening 100 investigations in the first 8 months, compared to 16 in 2005.  The report found that “straw students drop or withdraw from programs after they receive their credit balance payments and then kick back a portion of the funds to the ringleader and, if applicable, a recruiter.”

 

In one case, the Office of the Inspector General (OIG) prosecuted 64 individuals in a fraud ring that targeted Rio Salado College in Arizona. The OIG normally only prosecutes the ringleaders, because it lacks the manpower to pursue all of the fraudsters. “Prosecuting all the participants placed a significant burden on the criminal justice system,” wrote William Hamel of the OIG, in the 2011 report. 

 

The Apollo Group, the for-profit company that owns the University of Phoenix, has found over 21,500 fraudulent students since 2008. James Berg, Apollo’s vice president for ethics and compliance, told the Pope Center that about 0.4 percent of students were caught trying to commit fraud in the fourth quarter of 2012. Apollo has referred over 700 fraud rings to the Inspector General, with the average involving 19 students.

 

Pell-grant running tends to occur at community colleges and technical colleges, because tuition is low. For example, to carry a full load (15 credit hours per semester for two semesters) at Wake Technical Community College in Raleigh, North Carolina, costs $2,240. The maximum Pell grant is $5,500. Thus a Pell grant — the excess over tuition going to the student — can provide a lot of spending money.

 

Louisiana’s technical colleges, until recently, charged less than $1,000 per year to attend. But they found a couple years ago that as much as 12 percent of grant money went to Pell runners. The Legislature is raising tuition to reduce the incentive to steal the difference between tuition and the grant, but it makes education more expensive for honest students.

 

Henry Ford Community College in Dearborn, Michigan, is also raising tuition to repair the damage from Pell grant fraud. It has to pay back $9.5 million in grant money because a large number of students lost eligibility for the grants — either because they were fraudsters or because they dropped out of class before 60 percent of the semester was completed.

 

Part of the difficulty in determining fraud is the line between what’s fraud and what is poor performance. Many students drop out shortly after enrolling even with honest intentions — acting like Pell runners, but without intending to defraud. The six-year graduation rate of all Pell grantees is about 50 percent, and those of community college students, often well below that.

 

Some colleges seem to have found effective ways to fight Pell abuse. Central Piedmont Community College (CPCC) in Charlotte, NC, distributed nearly $16 million in Pell Grants to over 8,000 students in academic year 2012-13. Some of the measures CPCC takes to avoid fraud include not disbursing grant money until after 10 percent of the semester has been completed; not disbursing money if students haven’t attended during the first 10 percent of the semester; disbursing money in two parts to make sure that the students stay around; limitations on what can be purchased in the bookstore; and an advising department that tracks academic progress. This does require taking attendance and costly red tape.

 

Other efforts are targeted at preventing fraud through distance education. For example, scanned and emailed photo IDs, rather than faxes, since faxes produce poor quality images, making verification difficult.

 

The Apollo Group developed a four-person “fraud squad” in 2008. It has made significant advances since then, enabling the company to prevent over $110 million in financial aid from going to fraudsters, according to James Berg. “Very few people slip past the web we’ve created,” he said. “Word is getting around to not attempt fraud at the University of Phoenix.”

 

In sum, it’s unclear exactly how widespread Pell-grant fraud is, but it does seem that taxpayers are losing $1 billion a year to fraudsters. And in addition to the $1 billion in wasted tax dollars, fraud is driving up costs for both colleges, who have to pay back money to the federal government, and students, since it forces colleges to raise prices.

 

“I think we all have a responsibility to drive fraud out of the system,” Berg said.

 

Duke Cheston is a writer for The John W. Pope Center for Higher Education. Reprinted with permission, originally published February 26, 2013, <http://www.popecenter.org/commentaries/article.html?id=2811>.

 

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