Understanding FAFSA Fraud Cracks

Earlier this month, the House of Representatives passed the Ghostly Student Relief Act, which would require the Department of Education to screen federal aid applications for potential fraud in response to programs that cost colleges and universities millions of dollars each year.

The legislation, sponsored by Republican Rep. Burgess Owens of Utah, will actually consolidate an initiative the department has already introduced independently this spring. Called “Real-Time Fraud Detection,” a new feature of the Free Application for Federal Student Aid checks all applicants in what financial aid experts have called a major win for institutions that have battled these isolated programs for years.

The law itself has been highly controversial, cutting across party lines; only 36 Democrats voted with Republicans to advance. Rep. Bobby Scott, the top Democrat on the House Education and Workforce Committee, said on the House floor that Congress should wait and see how the department’s real-time tracking system works before making it permanent.

“Adopting this new system, without evaluating its effectiveness, does not make sense,” he said. Republicans, however, say the law provides a “general solution” to the issue.

The No Aid for Ghost Students Act is one of three laws House lawmakers have advanced this year to combat FAFSA fraud.

What is FAFSA Fraud?

Bad actors have been stealing financial aid funds for at least 10 years, according to Karen McCarthy, vice president of public policy and federal relations for the National Association of Student Financial Aid Administrators. Initially, fraudsters mainly targeted open institutions, where students did not have to provide much information to register, but the scams have increased over the years.

“I would say that we see it almost everywhere. It is certainly still prevalent in those institutions, but I would say that almost every institution has experienced some form of identity fraud at this point,” he said.

Here’s how it works: Fraudsters, sometimes referred to as “ghost students,” use stolen identities to apply for government aid and loans. Once they have the money, they disappear.

In accordance with EdSourceeducational news center covering California, criminals have become increasingly adept at evading detection, posing as under-18s or homeless to avoid certain verification requirements. Some even take a full semester of courses to steal aid the following semester.

ED officials said the prevalence of these scams has increased significantly during the COVID-19 pandemic, when online schemes, mostly applied by financial fraudsters, have proliferated. Scams have also increased with the rise of artificial intelligence, as some fraudsters use those tools to send more requests.

How Does Fraud Affect Institutions?

Financial aid fraud can be very costly to universities, which must pay the stolen money back to the federal government. There is no clear estimate of how much these scams have cost universities in total, but California statistics estimate that 116 community colleges lost nearly $2 million in the first quarter of 2026. According to a recent state study, Utah’s eight community colleges could lose up to $1 million in programs by 2025. 2025.

Some states and individual agencies have taken their own measures to combat FAFSA fraud. Many California community colleges are now using AI to screen financial aid applicants, for example, which has greatly reduced the number of successful scams in recent years.

Historically, institutions themselves have been responsible for rooting out fraudsters. But as the number of scams escalated, financial aid offices said they were powerless to do so and called on the federal government to step in. The Department of Education has responded to these calls by adding new fraud detection features to the financial aid program.

Scams also leave a person with a stolen identity and debt, a damaged credit score and difficulty finding real financial assistance in the future.

How Does Real-Time Discovery Work?

The ED initially said it would make tackling FAFSA fraud a priority by 2025 and announced Real-Time Detection earlier this year. The tool was released in April for the 2026-27 FAFSA, and the department has since reviewed any applications submitted before release.

Fraud detection software analyzes applicants’ behavior as they fill out the FAFSA, and if they show enough signs of fraud, they’ll be prompted to confirm their identity on camera. If they choose not to do so or the verification fails, their application will be rejected, warning the institutions not to issue funds.

The department said earlier this month that the new system “has prevented more than $100 million from falling into the hands of fraudsters.”

The details of how the FAFSA screens for those red flags are not publicly available, because the ED didn’t want to give fraudsters information they could use to navigate the system.

According to McCarthy, the new system should remove the burden of FAFSA fraud detection almost entirely from institutions.

“There is no need for us to reach the school [to potential scammers] and say, ‘Hey, you’ve been selected, I need you to send us a copy of your ID,’” she said. [and] they are a real person, they come from the help desk or reach … the institution should give them the opportunity to submit their credentials. But the idea is that pre-screening will eliminate most of the potentially fraudulent applications. “

Although financial aid administrators have largely praised the tool as it stands, McCarthy noted that there is some concern about the language in the No Aid for Ghost Students Act, which gives ED broad discretion to use identity checks on FAFSA filers to determine whether there is “reasonable suspicion” of fraud. College access advocates have warned that increased ID verification requirements could burden or confuse students and families, especially those who are not native English speakers, and stress the importance of data security for any sensitive documents students must submit.