Education Fraud Under the False Claims Act

Federal and state governments distribute billions of dollars every year to schools and students in the form of grants and loans. The number of scams involving student loans has steadily increased in recent years because of the limited safeguards in place to prevent and detect this type of fraud. As costs increase and budgets tighten in the education sector, it is more important than ever for whistleblowers to come forward with information involving financial aid fraud.

Whistleblowers play an important role in fighting education fraud. The False Claims Act permits private individuals, known as relators, to bring a qui tam lawsuit on behalf of the federal government to recover money lost due to fraud and other misconduct. If the government makes a monetary recovery, an eligible relator can receive a reward of 15% to 30%.

Types of Education Fraud

Research Grant Funding

Academic and scientific researchers at colleges and universities frequently apply for and receive grants from the federal government. Government agencies award grants for a specific purpose, and those grants are subject to a variety of terms and conditions. Individuals or entities who receive grant money based on false statements in a grant application, or use the funds for a non-approved purpose, are subject to liability under the False Claims Act. While grant fraud occurs in nearly all government agency programs, the National Institutes of Health is one of the biggest targets due to the large number of grants it awards each year.

For example, a qui tam complaint alleging violations of the False Claims Act was filed against a prominent North Carolina research university. The whistleblower, a former lab analyst, alleged that the defendants ignored warning signs about a biology researcher who later admitted to fabricating and/or falsifying data on numerous research projects. It was further alleged that the researcher, her former supervisor, and the university included the fraudulent data in government applications involving more than 60 grants worth nearly $200 million. The case is currently pending in United States District Court for the Middle District of North Carolina.

Education and School Programs

Congress has designated certain types of schools and academic programs for funding of select programs. For example, federal funds are provided for after school tutoring and special education. The E-Rate program was established by the Federal Communications Commission to provide discounted telecommunication services and internet access for schools and libraries.

The Department of Education’s Charter School Program awards grants for the creation of new charter schools and to assist with school facility costs. States also allocate a portion of their education budget to charter schools based on the number of enrolled students.  

Charter schools and their online counterparts have been subject of a number of lawsuits involving violations of various state and federal false claims acts. For example, a former teacher of an online school filed a lawsuit under the California False Claims Act alleging that the school published misleading advertisements regarding students’ academic progress, class sizes and hidden costs. The school agreed pay $8.5 million to settle the allegations of fraud.

For-Profit Colleges

Higher education institutions are subject to regulation under Title IV of the Higher Education Act. Title IV provides grants and loans to eligible schools and their students. A for-profit college that accepts federal funds in violation of Title IV can be subject to liability under the False Claims Act. Lawsuits involving for-profit colleges are typically based on allegations that the school provided incentive-based compensation to recruiters or made misrepresentations while recruiting students. For example, one of the largest for-profit education companies in the country was alleged to have violated Title IV by engaging in unlawful recruiting practices and running an admissions program that paid admissions personnel solely on the number of students enrolled. The company agreed to pay $95.5 million in settlement to resolve allegations that it violated state and federal False Claims Act provisions by falsely certifying compliance with Title IV and parallel state statutes.

Financial Aid Fraud

Fraud involving student financial aid is a growing problem for the educational system as well as the government. In fiscal year 2017, Federal Student Aid, an office of the Department of Education, provided more than $120 billion in federal grants, loans, and work-study funds to approximately 13 million students at nearly 6,000 participating schools. Although the vast majority of student loan borrowers are honest, unscrupulous school officials and individuals misuse the system for their benefit at the expense of taxpayers.

One of the most prevalent types of financial aid fraud involves the use of a “straw student.”  The perpetrators of this scam either use personal information from one of the conspirators in the scheme or information obtained through identity theft. The straw student’s information is used to apply for admission into an online education program and secure financial aid. This type of fraud is not usually detected in the early stages as fraudsters perform the bare minimum required to demonstrate participation in an educational program for disbursement of financial aid. Once the college receives payment, the straw student receives a federal aid refund which consists of the funds remaining after the college has deducted the amount of tuition. The straw student then abandons their courses, and the perpetrators disappear with the refund money. In many cases, neither the educational institution nor the government has any indication that a fraud has taken place. The money lost in these scams is often never recovered which results in the loss of hundreds of millions of dollars to the government and taxpayers.

A related type of fraud involves a “Pell runner,” a person who jumps from one college to another, staying just long enough to receive a Pell Grant refund. Pell Grant fraud not only harms taxpayers, it forces legitimate schools to increase tuition to recover the losses they incur as a result of these scams. 

Some public and private colleges have also engaged in fraud involving Pell Grants.  Unscrupulous educational institutions receive large amounts of Pell Grant funds and use the money to attract “more desirable” students rather than provide financial assistance to low-income students. These institutions not only undermine the purpose of the Pell Grant program to make college accessible to low-income students, they create additional burdens for low-income students by forcing them to take on extra student loans.

Sometimes financial aid fraud occurs without the school’s knowledge. In 2018, a private college in Washington, D.C. fired six employees after an investigation revealed that the financial aid office had misappropriated university-based grants to certain university employees. Several employees received grants in addition to discounts on their tuition. Since the grants exceeded the total cost of tuition, the employees kept the difference, which reportedly amounted to nearly $1 million.

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