Abuse of the Pell Grant and federal student loan system has been on the rise since the start of the recession.
Since 2007, the amount of Pell Grants categorized as "improper payments" has risen 86%, The Wall Street Journal reports, totaling $1 billion in both 2010 and 2011. Improper payments include those that are awarded to fraudulent applicants or due to clerical errors.
Things shaped up slightly in 2012, when improper payments declined by 7%, but $829 million worth of Pell Grants still slipped into the wrong hands. At the same time, the government lost a reported $614 million through the federal student-loan program as well.
The Journal reports that "crime rings" are responsible for many cases, in which people receive federal student aid even though they don't intend to go to school.
These scam artists are called "Pell runners," The Chronicle of Higher Education wrote in 2011. The criminals may apply for financial aid at several schools in one year and stay at one school just long enough to receive their money. Grants and loans first go to tuition at the school, but whatever balance remains is given to the student for books and living expenses.
Community colleges are especially susceptible to such fraud. Because they generally have lower tuition rates than four-year universities, that would leave a bigger slice of the pie left over for a student borrower or grant awardee.
Financial aid offices have ways of targeting potential abuses, but no system is perfect. According to The Journal, about 1% of those seeking aid for the 2013-2014 school year were flagged for potential misuse of the system.
Regulations are now on the books to try and reign in this kind of fraud. In 2010, the federal government expanded the instances in which schools are responsible for giving out aid to students who don't attend class, according to The Journal. The government no longer absorbs all of the losses, and schools can lose federal aid if a high proportion of former students default on their federal loans.
For example, at Henry Ford Community College in Michigan, administrators might have to raise tuition next year because the school owes the federal government $4.1 million as a result of fraudulent Pell Grant payouts, the Detroit Free Press reported. That's about 10% of the Pell Grant money the college received in the past year.
More From Business Insider