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, 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—to Pell recipients totaled 2.7 percent of disbursements in 2011. Kantrowitz’s higher number is based on the number of students who receive grants but never obtain degrees. Considering that the Education Department doesn’t have the manpower to track down all fraudsters, Kantrowitz’s estimate may be closer to reality.

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

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

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

Such fraud has lately become easier to commit due to the rise of online education, since students don’t even 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 of 2011, compared to just 16 investigations in 2005.  The report found thatstraw 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) investigated and prosecuted all 64 individuals in a fraud ring that targeted Rio Salado College in Arizona. However, the OIG normally only prosecutes the ringleaders, simply 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 (the largest private school in the country), has found over 21,500 fraudulent students since 2008. (Most of the University of Phoenix’s students take online classes.) 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, according to Inside Higher Ed.

Outside of criminal rings, Pell grant running tends to occur at community colleges and technical colleges, because tuition is low. For example, to carry a full load (15 credits 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, which focus on job training, 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, according to the Chronicle of Higher Education. That will 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, partly to repair the damage from Pell grant fraud. It has to pay back the federal government $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 the scope of Pell grant fraud is the blurry line between what’s fraud and what is simply poor performance. Many college students drop out shortly after enrolling even with honest intentions—acting like Pell runners, but without intending to defraud anyone. As Jenna Ashley Robinson and I wrote in our report on Pell Grants last year, the six-year graduation rate of all Pell grantees is about 50 percent, and the graduation rates of community college students are often well below that.

Some colleges seem to have found effective ways to fight Pell grant 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. Jeff Lowrance, the college’s public information officer, said the school “has not experienced any formal cases of Pell grant fraud that resulted in investigations by the U.S. Department of Education or the Office of the Inspector General.”

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 over the semester to make sure that the students stay around; limitations on what can be purchased with financial aid in the bookstore; and a counseling and advising department that tracks academic progress and puts students on probation or suspension. Of course, this does require taking attendance and a costly red tape.

Other efforts are targeted at preventing fraud through distance education. For example, Ryan Chase, director of financial aid at Rio Salado College in Arizona, wants the use of scanned and emailed photo IDs, rather than faxes, since faxes produce poor quality images, making verification of identity difficult.

The Apollo Group developed a four-person “fraud squad” back in 2008. It has made significant advances in crime fighting since then, enabling the company to prevent over $110 million in federal 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.