A list of papers I reviewed for a future post about Parent PLUS loans surfaced an eye-opening sentence about financial aid fraud from a 2022 article published in the American Journal of Cardiology:
“At the suggestion of Larry Summers (the Obama Administration) ‘urged state unemployment offices to send a letter to every person receiving jobless benefits telling them they could get financial aid, such as Pell Grants, if they enrolled in their local college’…This led to the enrollment of at least 500,000 students…A significant number didn’t plan on graduating…they needed the money to live…Student loan money had become a form of welfare.”
I was floored after reading the statement. During this period, many of the large online universities like APUS were besieged by students nicknamed “Pell runners” and fraudsters who enrolled unsuspecting adults in online programs by stealing their key identity statistics, such as full name, date of birth, and social security number.
Both groups sought excess Title IV loan funds for “costs of attendance.” The Pell runners never intended to earn a college degree, but intent was difficult to discern when admissions people never met the newly enrolled students in person. The writer of the above journal article indicated that the intent of that memo was to increase the “welfare” payments to the unemployed, not necessarily within legal means.
Was a Memo Sent to State Unemployment Offices?
Because I was unaware of the original letter, I searched and found several sources that confirmed a letter was sent to state unemployment beneficiaries informing them about the availability of Pell grants to pay for the costs of living and training courses.
My first source accessed was CNN’s coverage of President Obama’s May 2009 announcement that unemployed individuals would not be denied Pell grants if they enrolled in training programs at colleges and universities.
I found a copy of the draft letter sent to state unemployment offices on the U.S. Department of Labor website. Below is a partial screenshot of that form letter:
It wasn’t hard to find another example of the same letter as distributed by the states. Less than 60 days later, on July 10, 2009, the state of Massachusetts distributed the letter recommended by the Obama Administration. A partial copy is appended below.
I did not attempt to find other letters from other states. A 2017 paper mentioned below indicates that 46 states distributed a version of this letter to their unemployment beneficiaries.
My Recollection of the Pell Runner Impact at APUS and Elsewhere
The Pell runner period is hard to forget for anyone who experienced its impact on their institution.
In the summer or fall of 2010, our provost met with me and indicated that we were seeing a disturbing trend in new student enrollment. APUS developed a student success course that was required for all new students. Its course number was RQ295.
According to our provost, many of the faculty teaching sections of our RQ295 class were experiencing student withdrawal rates of 60 percent or more. She asked me if we had changed our student recruiting processes or advertising. I told her that I was not aware of any changes in either processes or advertising.
I added the provost’s concern to our next regularly scheduled senior management meeting. APUS’s CFO mentioned that the number of students applying for financial aid had increased, as had the volume of our checks reimbursing students the balance of their Pell grant and/or student loan balance after applying tuition. Nearly every department was tasked to gather data to reveal the extent of the problem and what could be done to stop it.
It took us a while to gather enough information, but we ultimately concluded that the number of new students applying for financial aid at APUS had increased a month or two after the University of Phoenix, at the time the largest online university, had modified its financial aid disbursement policy from a single payment to two.
Steps APUS Took to Reduce the Number of Pell Runners
The period during which the Pell runners trend surfaced was a significant growth period for online education. As admission and student financial aid applications increased, our management team was concerned about maintaining our ability to meet the needs of our students.
In addition, it had only been approximately three years since APUS, a wholly online institution, was approved as a Title IV institution. Prior to June 2006, the 50/50 rule precluded institutions operating online courses only from being approved to award financial aid under Title IV’s rules and regulations.
Measuring student intent was and is difficult from a distance. Procedures in place at the time for our active-duty military students required them to receive authorization for their online courses from an Education Services Officer (ESO) located at their base. We assumed intent for those students was addressed when enrollment was approved by the ESO. We directed our focus to students using federal student aid as their primary funding source.
One of the first changes we made was to change our financial aid disbursement policy, like the change implemented by the University of Phoenix. That would ensure that students had to attend the class longer before receiving their check for funds more than tuition. We also changed our attendance policies and automatically dropped any student who did not log in to class during our free drop/add period, which was the first week of class.
It took just a few months to make these first changes, but as time progressed and the numbers of students continuing to apply for financial aid and then refund checks continued, we worked with the U.S. Department of Education to apply other measures to deter fraudulent students or people who enrolled “straw students” to receive the excess funds.
A government-issued scanned identification card, like a driver’s license, was required of all new applicants, as well as two additional documents (utility bills) that matched the address on the driver’s license. We ran a report to detect when more than one student enrolled with the same physical address or changed their physical address just prior to the time that financial aid refund checks were disbursed. We ran another report to detect if applications and registrations were completed at the same url address. If so, financial aid had to follow up. High school transcripts confirming the students’ graduation were required as well even though many public schools send transcripts to storage a few years after a class graduates. Introductory statements from each student of at least 250 words were required assignments in the first week of the typical first courses (RQ295, English 100, etc.), and those statements were submitted to our plagiarism-detecting software to determine their originality. In many cases, the people enrolling straw students used the same essay.
For students whose activity ceased after receiving their refund check, we built software to determine their last academic activity in the electronic classroom and were required to refund the Department of Education for Pell grant money that we received based on the last activity date, not the date that we determined a student had dropped out without notifying us.
Collecting from the “student” for that difference was impossible. That impacted our bad debt percentage. We also added another grade deemed an “unearned F” to our student records and transcripts. The unearned F designation was important for us to manage and track our long-term progress in student persistence.
As the number of fraud rings increased, APUS was impacted by them as well. We hired a national private investigation firm to attempt to track down sources of fraudulent enrollments. One of those sources was an unemployment office in a county in a Southern state with a high percentage of low-income residents.
Another source was the property management office of a Section 8 subsidized apartment complex, and another was a barbershop in a small town. APUS reported all our findings to our contacts at the Department of Education. No one indicated at the time that the unemployment office may have surfaced due to the letter.
These students impacted our institution’s completion rates, graduation rates, and cohort loan default rates. The first two impact areas skewed our academic reputation, even though the students’ academic intent was not legitimate.
The last impacted us financially (because of the refunds) and reputationally, since high cohort default rates are used as evidence that your students cannot repay their student loans. The Department gave no institution (including APUS) relief by removing the students who dropped out as soon as they received their checks from our cohort default population. They also did not pursue charges against them unless they were part of a “ring” of students enrolled. I believe that if all institutions that identified Pell runners submitted a list of names to the Department of Education, the Department could have implemented blocks in future Pell grants and/or student loans for students that previously abused the system. In hindsight, the memo to the state unemployment offices might have been an indication of that administration’s posture toward providing “free money” to the unemployed.
When the Biden Administration contemplated various components of loan forgiveness, I wrote an article expressing my concern that many Pell runner loan borrowers would have their loans forgiven because they were small balance loans. I doubt that my suggestion was considered. It’s likely their loans were forgiven even though Pell runners chose to defraud the system.
Was There Ever a Linkage of the Pell Runner Trend to the Obama Letter?
I have not been able to find any linkage of the Obama letter to the Pell runner trend.
An August 2011 article in The Chronicle of Higher Education by Kelly Field indicated that the “problem” was pervasive at low-tuition institutions like community colleges. Ms. Field also indicated that the cost of the Pell program had doubled over the past three years and noted that David Bergeron, deputy assistant secretary for policy in the Office of Postsecondary Education, said that the Department of Education took the problem seriously and was working to identify those who were abusing the system.
Ms. Fields contrasted the difference between Pell runners who apply for Pell grants at an institution that charges less than the max grant of $5,550, receive money back for “books and other expenses,” pocket the money, flunk out, and move on to the next college versus organized fraud rings “exploiting ‘low-cost’ institutions” and enrolling dozens of students at an institution before moving on to another.
A February 2013 article written by Duke Cheston and published by the James Martin Center at the University of North Carolina Chapel Hill quoted financial aid expert Mark Kantrowitz, who estimated that the Pell fraud was costing the government as much as $1 billion per year. Kantrowitz’s estimate was approximately 50% more than the Obama Administration’s estimate in 2011.
The Cheston article outlined that Pell runner fraud expanded when students or fraud rings applied to online programs where they could request student loan funds beyond the Pell grant (WEB note – many community colleges have not participated in federal loan programs because a Pell grant will cover their tuition, fees, books, and other expenses).
The Cheston article also mentioned some of the measures taken by the University of Phoenix and several community colleges to prevent fraud. The University of Phoenix reported having identified more than 21,500 fraudulent student cases since 2008.
Cheston also reported that the colleges had to repay monies disbursed to the fraudsters to the Department of Education, even though the colleges did not receive the money themselves.
I found a paper titled “A Letter and Encouragement: Does Information Increase Post-Secondary Enrollment of UI Recipients?” co-authored by economists Andrew Barr and Sarah Turner and published in 2017, which provides an indication of the letter’s impact on college enrollment of the unemployed.
The researchers estimated that approximately 20 million letters were sent to Unemployment recipients after the Obama Administration guidance was sent to state unemployment offices. They also estimated that at least 500,000 unemployment recipients enrolled in college.
According to the researchers, the increases in enrollment of unemployed recipients were “striking. ” The enrollment increases of four to five percentage points were 40% above the baseline. The effects of enrollment were largest among blacks and women. The effects were also larger in states and months where labor market conditions were worse. This latter finding correlated to APUS’s private investigator finding of sites that spread the information about enrolling online to get “free money.”
The estimated increase in college attainment for recipients was .1 years (yes, that’s one-tenth of a year), not exactly significant, but it indicates to me that few recipients remained enrolled in college for any period since most semesters range between 8 and 16 weeks (.1 years equals 5 weeks).
The researchers attempted to measure the family members of unemployment recipients and whether the issuance of the letter impacted their enrollment in college. The findings were inconclusive.
The Pell Runner Trend Continues
In 2021, the Los Angeles Times reported that more than 65,000 fake students applied to California community colleges over the past few months. I wrote an article about that situation. I commented in my article that the timing was interesting given that the Department of Education had reduced the number of financial aid students whose tax returns were required to be verified by the institution before the financial aid awards could be finalized and distributed.
Reducing the number of verification students was to “increase the number of low-income students who could gain access to financial aid.” That idea seems very close to the logic that generated the original Obama Administration letter to states about advising unemployment beneficiaries how to access Pell grants.
A 2025 AEI blog post by Michael Brickman opines that the Biden Administration’s reduced income verification processes likely led to increased fraud related to Pell grants and student loans.
An April 14, 2025, article in the Voice of San Diego indicates that the number of fake students has continued to increase, with perpetrators using AI bots to enroll more students in California’s community colleges.
When I read about professors’ experiences in California with many fake students enrolled, it reminded me of our experiences at APUS in 2010. Armed with AI tools, fraudsters have been able to submit AI-generated work, hoping to keep fake students enrolled in the classes long enough to collect the excess disbursements scheduled by colleges at the beginning of week three.
The reporter cited sources claiming that fraudulent students enrolled at California’s community colleges received more than $11 million in state and federal aid in 2024 and that bots generated 25 percent of community college applicants. The colleges that have reduced their exposure have task forces that meet regularly to find new ways to offset the advances of the AI-generated bots.
Final Thoughts
I mentioned earlier that I was unable to find anyone who determined that the increase in Pell runners experienced from 2010 through 2014 was related to the Obama Administration’s letter to state unemployment offices. Perhaps it was only a coincidence. I may not have the tools or data to prove it, but I think not.
The Department of Education has indicated that it intends to conduct negotiated rulemaking on various rules, regulations, and policies related to federal student aid. Members of the public who cannot attend the open hearings on April 29, 2025, or May 1, 2025, are encouraged to submit comments through the Federal eRulemaking portal at regulations.gov.
I am passionate about the need for affordable higher education opportunities. I was an early recipient of a Basic Opportunity Grant (the predecessor of Pell grants) when I attended Duke University in the 1970s. At the same time, I think it’s important to develop financial aid program safeguards that reduce the opportunity for fraud or misuse.
I understand why an 18-year-old student moving from high school to college will not have a credit report, but why wouldn’t we require a credit analysis for students who are over 30 or who have not been enrolled in college for more than 10 years? You could ignore poor credit ratings for the tuition and fees portion of a grant or loan if you wanted to enable a legitimate student a chance to escape poverty but shouldn’t ignore it for funds in excess of tuition and fees for online students if the odds are high that those “students” will not complete their program of study.
It will take a while for the public comments to be reviewed, the negotiated rulemaking sessions to be organized and conducted, and new or revised regulations to be implemented. Hopefully, new ideas will surface to reduce the potential for fraud or abuse in these programs.
