The New Front Line in the Fight Against Higher Ed Financial Aid Fraud

Financial aid is central to higher education’s promise of opportunity. But that promise is under threat. A wave of increasingly sophisticated fraud is straining budgets, skewing enrollment data, and—most alarmingly—blocking access for real learners.

This isn’t just a few bad actors gaming the system. Higher education is facing a systematic, coordinated attack. Fraud rings are using bots, synthetic identities, and stolen personal data to enroll “ghost students” and siphon off millions in financial aid.

Open-access institutions, especially community colleges, have become prime targets. But they are not powerless. Building on insights from a recent Campus Convos discussion between BibliU CEO Dave Sherwood and N2N Services CEO Kiran Kodithala, this blog explores how AI-driven tools are emerging as a powerful new defense—offering a smarter, faster way to protect aid dollars and restore trust.

Ghost Students and a Growing Crisis

At its core, financial aid fraud involves submitting false or stolen information to receive federal, state, or institutional aid. Once sporadic and low-scale, this fraud has exploded in recent years, both in scale and sophistication, according to EDUCAUSE Review.

Today, criminal rings use stolen Social Security numbers and generative AI to mass-produce fake identities. They often target open-admissions colleges, where minimal scrutiny and automatic acceptance make it easy for ghost students to slip through the cracks.

Once aid is disbursed, the funds are withdrawn and the fake students vanish—leaving real students to fight for limited class seats and institutions to grapple with financial loss and reputational risk.

The U.S. Department of Education has reinstated several FAFSA fraud detection measures in response to these breaches. But on the ground, institutions remain the first, and often only, line of defense.

Fraud by the Numbers

Financial aid fraud has quietly become a national crisis.

In the U.S., estimated losses due to financial aid fraud now exceed $100 million annually, a tenfold increase from pre-pandemic levels. And the real number could be far higher, given the difficulty of detection and institutions’ reluctance to report incidents publicly.

California’s community college system offers perhaps the clearest picture of the scale. According to Open Campus, over 900,000 applications were flagged as fraudulent between 2021 and 2024. Laney College, for example, reported that in some courses, nearly 50% of enrolled students were fake.

This fraud doesn’t just cost money—it warps the entire higher ed ecosystem:

• Budgets are strained, as institutions pay out aid that may never be recovered.
• Enrollment data becomes unreliable, affecting state funding and strategic planning.
• Seats are filled by ghost students, preventing genuine students from enrolling in the courses they need to graduate on time.

If left unchecked, financial aid fraud undermines the very mission of access and affordability that community colleges and other open-access institutions were built to uphold.

Why Community Colleges Are Bearing the Brunt

Community colleges are on the front lines for good reason: their open-access policies are designed to  lower barriers for students who might not otherwise attend college. 

Most community colleges do not require entrance exams or detailed vetting. Many offer generous financial aid packages, including federal Pell Grants and state-specific funding. While their accessibility and flexibility is a strength for learners, it is also an opening for fraud. 

Compounding the problem is the shift to online learning during and after the pandemic. The move to asynchronous courses, while expanding access, has also removed many traditional safeguards. Students can now register, enroll, and participate without ever stepping foot on campus, making it harder to detect fraudulent identities.

According to GovTech, bots and AI-generated applications are now commonplace, overwhelming systems built for smaller-scale threats. The result? A constant game of catch-up for institutions.

AI’s Answer to a Growing Threat

Fortunately, safeguarding technology is evolving as quickly as the issue.

At the forefront is LightLeap AI, an AI-driven fraud detection platform developed by N2N Services. As CEO Kiran Kodithala explained on Campus Convos, 

“Over the last six months, we processed over 2 million applications and caught over 450,000 fraudulent applicants [in California Community Colleges].” 

LightLeap AI evaluates applications at the point of submission, flagging suspicious patterns and indicators before ghost students can register or claim aid.

This proactive approach saves not just money, but also significant time and administrative effort. As Kodithala puts it, “As soon as we see a fraud indicator on the application stage, we mark them as fraudulent so that they can't even register for a course…That is a fail safe for the institution.”

Other emerging tools include:

• Element451’s BoltAI integrates fraud detection directly into admissions CRMs, helping schools triage more efficiently.
• AMSA’s S.A.F.E. platform uses real-time identity validation to cross-check applicant data against verified sources.

These AI-powered tools can analyze patterns not easily detectable by humans and adapt to new fraud tactics faster than traditional systems.

Fighting Fraud, Funding Student Success

Fraud detection isn’t just about saving money—it’s about shielding students and the systems that support their success.

Students, families, and taxpayers expect institutions to be good stewards of financial aid. Implementing smart fraud detection tools is a public commitment to equity, integrity, and trust. Every dollar saved can—and should—be reinvested into student success initiatives.

So, what do students really want? Research shows that high-impact support services—advising, tutoring, mental health counseling, and career readiness programs—are key drivers of satisfaction and persistence.

 According to Ruffalo Noel Levitz, colleges that implement early-intervention programs and motivational assessments see meaningful returns in graduation rates.

At Texas Tech University, a major investment in student support services helped boost the four-year graduation rate to 51% and the six-year rate to 69%, the highest in the institution’s history. Services like academic coaching, financial advising, and life skills support were critical to that success.

When institutions invest in protecting their aid systems and reinvest those savings into student support, they do more than just stopping fraud—they expand opportunities for real learners.

The Path Forward for Higher Education Leaders

Higher education leaders face no shortage of challenges: declining enrollments, rising skepticism about the value of a degree, shrinking public funding—and now, financial aid fraud is testing institutional resilience. But leaders have the opportunity to combat this problem proactively.

Fraud prevention is a strategic investment in the future of affordable, accessible education. With AI-driven tools, institutions can protect their financial resources, preserve enrollment integrity, and, most importantly, ensure aid dollars reach the students who truly need them.

In an era where trust and accountability are paramount, colleges and universities must move beyond short-term fixes. They must adopt technologies and strategies that reflect their mission: expanding opportunity, promoting success, and ensuring that every student—real student—has a chance to thrive.

Explore more BibliU insights on how leading institutions are securing access, equity, and resilience for the future.