Student loan scams flourish

A college freshman. A group of prison inmates. An elderly grandmother.

They all have very different backgrounds. But they also share a common characteristic: Each was the victim of identity theft in which someone used their social security numbers to fraudulently obtain student loans.

The Identity Theft Scam
"There's a growing trend in the area of identity theft related to Financial Student Aid programs," says Natalie Forbort, a special agent at the Office of Inspector General, or OIG. Within the U.S. Department of Education, the OIG staff investigates all manner of student loan scams and misused federal financial aid. They do their best -- OIG investigations often root out big cases of fraud totaling hundreds of thousands or even millions of dollars.

But with thousands of colleges and universities potentially eligible to receive federal money, and more than $100 billion in new aid disbursed annually to some 14 million borrowers, the Department of Education "faces a formidable challenge in ensuring that...funds reach the intended recipients," Deputy Inspector General Mary Mitchelson said in a recent report.
According to the OIG's Management Challenges Report for fiscal year 2010, the Federal Student Aid office simply does not have "sufficient capacity or resources necessary to provide effective oversight for all aspects of the student financial assistance programs, leaving programs vulnerable to waste, fraud and abuse."

That's just part of the reason why student loan scams are flourishing. The economic downturn, which has driven some desperate people to wrongdoing, advances in technology that allow crooks to use the Internet in more sophisticated ways than ever before and with greater anonymity, and plain old-fashioned greed are all playing a role in the rise of financial-aid fraud.

And not just identity theft scams, but other financial aid cons as well.

Here's a look at some other common student loan frauds of which all current and former students – and the general public – should be aware.

The Advance Fee Scam
With this scam, con artists purport to offer student loans but tell potential borrowers they first have to pay a fee – usually about 3% or 4% of the loan amount – in order to secure the loan. If you come across a "lender" like this, don't be fooled.

"The general rule of thumb is that if you have to pay money to get money, it's probably a scam," Mark Kantrowitz, publisher of the financial aid and scholarship websites and, told WalletPop. "Legitimate student loans, both federal and private, do not charge upfront fees. If there are fees, they're deducted from the disbursement check."

What kinds of fees are legitimate in the student loan universe? Federal Stafford loans have a 1% default fee but charge no origination fees, thanks to recent changes in the law. With federally sponsored Parent PLUS Loans, the government charges a fee of up to 4% of the loan.

Fees vary with private loans. Some have no fees; others do impose charges, such as "disbursement" fees. When fees are assessed on private loans, they generally range from about 3% to 5%.

Be aware, though, that even with the exact same lender, fees can run the gamut. For instance, Kantrowitz said that Sallie Mae offers a continuing education loan with fees that range from 0% to 5% of the loan amount.

The Loan Consolidation Scam
After leaving school, it's common for college grads – or even those who didn't complete their degrees – to want to consolidate student loans in order to lower their monthly payments.

This is another area that's ripe for potential fraud. Unscrupulous individuals may try to prey upon those looking to combine loans by offering bogus loan consolidation programs that do nothing. Like the advance fee scam, the loan consolidation scam is really about a fraudster getting you to fork over money, allegedly to cover "processing," "administrative" or "consolidation" charges.

If you have federal loans, however, you know you're dealing with a crook if he says you need to pay any charges to get your loans consolidated. "Federal consolidation loans have no fees whatsoever," Kantrowitz notes. also tracks private lenders that offer loan consolidation. Right now, there are only four private lenders that do so. If a private lender offers you a loan consolidation and it's not listed on, check out the company very carefully before supplying your personal information or paying any fees.

The Debt Elimination or Bankruptcy Scam
Under this heist, someone will falsely claim that they can discharge your student loan debt – for a price. A federal grand jury in May indicted a 51-year-old Kansas City, MO man for an alleged scam of this type.

Such claims are a dead giveaway of fraud, unless you qualify for one of the federally-approved reasons to get a student loan canceled, such as you're totally and permanently disabled, your school closed, or someone forged your signature to get student loans.

A variation on The Debt Elimination scam is The Bankruptcy Scam, where someone says they can discharge your student loan debt in bankruptcy court. Then they try to get you to pay "legal" fees or other costs associated with a bankruptcy filing.

A word to the wise: Unlike credit card debt, student loan obligations can't be written off in a bankruptcy – not yet anyway. (There was, however, legislation introduced this year in Congress to allow consumers to discharge private student loan debt in bankruptcy court; the House and Senate are still considering the idea).

Institutions, Government and Taxpayers Get Defrauded, Too
Of course, students and families aren't the only victims of student loan and financial aid fraud. Sometimes universities and other institutions that dole out money are the fraud victims when students perpetrate crimes to get dollars for school.

Such is alleged to be the case with a former Harvard senior, Adam B. Wheeler, who now faces criminal charges for falsifying documents to get into the Ivy League school and roughly $45,000 in scholarships, grants and financial aid, according to The Boston Globe.

In another case, it wasn't a student who pulled off a major financial aid scam, but someone pretending to be a student.

The Fake Student Scam
Trenda Lynn Halton, of Peoria, Ariz., recruited 64 "straw students" to pretend that they enrolled in Rio Salado College in Phoenix in order to get more than half a million dollars worth of Stafford Loans and Pell Grant funds. Halton was recently sentenced to 41 months in prison, ordered to repay $581,060 in restitution to the U.S. Department of Education, and ordered to perform 100 hours of community service.

Con jobs like this one – let's call it The Fake Student Scam – have real consequences.

"Halton quarterbacked a network to steal taxpayer funds intended for real students actually studying," U.S. Attorney Dennis K. Burke said in a statement. In other words, those federal loans and grants that went to Halton and her network of pretend students meant that those dollars weren't available to dozens of other legitimate students who were truly needy and deserving of such money.

But the OIG staff at the Department of Education must feel there's some justice in the world: Thanks in large part to the OIG's efforts, Halton and her co-conspirators have all either pleaded guilty, been sentenced or are awaiting sentencing.

So while most real students will be enjoying a much-needed summer vacation next month, Halton will be starting her prison sentence on July 19.


Know of a Student Loan Scam?

Report it to the OIG Hotline: 800-MIS-USED

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