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FAA Guide to Detecting Fraud on Financial Aid Applications
The discussion below concerns detecting fraud by students and parents on financial aid applications. Information about preventing financial aid fraud in which families are the victims can be found in the Scholarship Scams section.
Educational aid fraud is a serious problem. A US Department of Education audit of 2.3 million 1995-96 Pell grant recipients found that 4.4% -- about 100,000 -- had reported income figures on their financial aid applications that were lower than the figures reported to the IRS. This section offers advice on identifying fraud on financial aid application forms, as well as fraudulent scholarship offers:
Common Types of Fraud
The most common types of fraud will involve underreporting of income and assets and overstating the number of family members in college. Some families may even go so far as to provide a falsified copy of their income tax returns.
Look for the following warning signs:
Also compare the income with the levels required for the Earned Income Credit (EIC). If the family appears to be eligible for the EIC but the return does not reflect this, investigate further. Either you'll turn up evidence of fraud, or make the family realize that they are eligible for the EIC.
A common technique for hiding assets is to buy bonds, especially Zero Coupon Bonds (which pay interest only at maturity). Ownership of these bonds won't show up on the family's income tax returns, since they do not report any interest, dividends, or capital gains until they sell them. Families are more likely to do this than hiding cash in a mattress, since it still provides them with some interest income.
Tips for Combating Fraud
Tips for combating fraud typically fall into three groups. The first
involves obtaining independent third-party documentation to confirm
the information on the application form. This involves looking for
external inconsistencies. The second involves making
inferences from the supplied information and comparing ratios to
statistical norms. It also involves cross-referencing the available
information, looking for internal inconsistencies. The third involves
establishing policies to deter fraud.
Documentation and External Inconsistencies
Inferences and Internal Inconsistencies
Choosing an appropriate return on investment figure is
difficult. Dividends, for example, vary by the
stock. The Dow Jones Industrial Average had an average
dividend yield of 2.7% in 2005, while the NASDAQ 100
had an average dividend yield of 1.2%. Bank accounts get different
yields depending on whether they are checking, money
market, savings or certificates of deposit. Perhaps the best approach
is to conservatively multiply by a factor of 20, and if the stated
assets is significantly lower than that, it probably
indicates underreporting of assets.
Policies
Remember that some cases of apparent fraud are genuine errors. After all, many families find financial aid confusing - it is extremely complicated and has its own language - so some cases of apparent fraud might be nothing more than innocent mistakes. When you uncover fraud, do not get emotional or upset. Instead, handle it in a professional and detached manner. Focus your review on factual information, and try to avoid making statements about the family's intent. If the family committed fraud, they know that they got caught, and don't need you to tell them this. If the family made an honest error, you will have avoided upsetting them by unfairly accusing them. By concerning yourself only with the gathering of facts and the opportunity to educate, you will present yourself as being fair and professional.
The facts will often speak for themselves. For example, if the discrepancies on the financial aid forms are small in nature and do not have much of an impact on financial aid eligibility, it is unlikely to be a case of fraud. But if the family understates their income by several thousand dollars, that fact alone will suggest fraud. If the family is sophisticated enough to commit fraud in a fashion that appears innocent (e.g., a digit transposition in the income figures), the only thing you can do is report the discrepancy.
Even if an apparent error does not rise to the level of conflicting
information or the error does not appear to affect aid eligibility,
such as an error in assets below the asset protection
allowance, it might still worthwhile to send the family a letter that
notes "there seem to be errors on your FAFSA, such as asset figures
that are inconsistent with the amount of interest and
dividend income reported on your income tax return". Chances are if
the family failed
to report some assets, that isn't the only "error" on their
FAFSA. Reminding them of the penalties for fraud might
encourage them to correct all the errors, including a
few you didn't notice.
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