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Focus on Regulation

U.S. Department of Education Takes Steps to Curb Student-Aid Fraud

US Department of EducationThe U.S. Department of Education announced in the Federal Register that it plans to develop new regulations to prevent fraud and promote proper use of federal student financial aid funds awarded to distance education students. 

The May 1 announcement follows an earlier ED Office of the Inspector General report that described the increase in fraud-related incidents involving federal student aid disbursed to distance education students. 

In that report, OIG explained that its investigations had discovered similar patterns:  Typically, a ring leader obtains personal information, uses it to enroll in online programs and apply for financial aid, and actually participates in the program only to the extent necessary to secure financial aid disbursements.  Low-cost institutions are particularly vulnerable to such fraud because students are able to receive payments (for living and other expenses) equal to the difference between their total federal student financial aid award and their institution’s tuition and fees. Recently, after an OIG investigation, a federal grand jury indicted four individuals alleged to have participated in such a scheme in Arizona.

In response to OIG’s findings, the Department issued a Dear Colleague Letter (GEN-11-17) with recommendations for institutions to address potential student-aid fraud in distance education programs and formed a task force to address issues raised in the OIG report.

ED’s recent announcement that it will negotiate new regulations to combat fraud contains a number of clues about the Department’s plans.  The announcement suggests the Department may require institutions to disburse federal student aid funds to students’ bank accounts through electronic funds transfers instead of checks.  ED also appears interested in whether students should have a greater role in deciding whether to accept debit cards or other banking services that an institution provides for disbursement purposes.  The Department plans to consider whether to “update and streamline” regulations that govern campus-based federal student financial aid programs.