FinCEN Asks Banks To Step Up Efforts At Detecting Student Aid Fraud

In an alert issued this July, FinCEN urged banks and other financial institutions to increase their focus on detecting, preventing, and reporting fraud schemes targeting federal student aid (“FSA”) programs. The alert provides specific red flags for identifying suspicious activity—and signals that regulators expect proactive compliance efforts.

The United States Department of Education (“ED”) has launched a national effort to prevent student aid fraud, and estimates that it prevented about $1 billion in FSA-related fraud in 2025 alone. The scale of FSA funding—and the associated fraud risks—is enormous. Every year approximately $120 billion go out to around 13 million students for grants, work-study funds, and low-interest loans. The FSA office also oversees the Free Application for Federal Student Aid (FAFSA), through which students apply for financial aid for post-secondary education.

FinCEN’s alert identifies the three most common types of schemes to defraud the FSA program, explaining how in each case, fraudsters seek to divert funds intended for bona fide student-recipients of federal aid. FSA funds are paid directly to educational institutions, and once those institutions apply the funds to any tuition and fees the student-recipients owe, the institutions then issue a “refund” of the difference to the students for use toward living expenses. Students must be enrolled in the institutions for 60% of the enrollment period to receive these refunds, and it is these refunds that most FSA schemes target.

The three types of schemes FinCEN identifies are those using “ghost students,” “straw students,” and insider assistance.

• Ghost Students: In ghost-student schemes, fraudulent actors either use personally identifying information (“PII”) of identity theft victims, or wholly fabricated information to create synthetic identities, in order to pose as legitimate students. They then enroll these “ghost students” in educational institutions and apply for federal student aid and collect the FSA refunds. To satisfy the requirement that students maintain enrollment for 60% of the enrollment period, the fraudulent actors often use AI chatbots to complete the coursework.
• Straw Students: Straw-student schemes are similar to ghost-student schemes, except that the enrolled student is a willing participant. In these cases, individuals provide their PII to be used in the fraudulent scheme, and they are willingly enrolled in educational institutions. The straw students typically do not attend classes, with the fraudsters ensuring the completion of any coursework required to satisfy the 60% requirement.
• Insider-Assisted Schemes: Lastly, FinCEN explained that in some cases, a staff member with insider access will facilitate the scheme, including by recruiting straw students and helping ensure they get approved for FSA funds. The insider staff member will then either steal the aid refund entirely or require the students to pay a portion of the funds as a kickback in exchange for facilitating the scheme.

Banks can spot these schemes by watching for red flags when stolen refunds are laundered. Entities can usually identify deposits as FSA refunds by the transaction references in ACH deposits—typically identifying an educational institution (either by name or a common abbreviation) and “refund.” Once entities identify incoming FSA refunds, they may be able to flag the common tools used to launder the fraudulently obtained proceeds, including the use of “money mules” to transfer the funds, shell companies, fraudulent accounts opened with fake customer identification materials, and abuse of digital assets.

As guidance to banks and financial institutions seeking to improve detection of FSA schemes, FinCEN identifies the following “red flags,” which either independently or in conjunction with other indicators—such as a customer’s historical financial activity, whether transactions are in line with prevailing business practices, and whether multiple red flags coexist—can indicate that an account or customer is involved in an FSA fraud scheme:

• An account that receives FSA refunds where the account’s history and the customer’s profile are not consistent with enrollment at an educational institution, especially if the stated recipient of the refund has no known connection to the account.
• A customer uses funds received from a student aid refund to quickly purchase digital assets, and then rapidly transfers them to a digital asset wallet for no apparent legitimate purpose.
• Multiple unrelated students use the same account to deposit federal student aid refunds.
• A newly established customer account is funded solely by student aid refunds and lacks other financial activity.
• A customer receives multiple peer-to-peer or wire transfers from accounts that recently received student aid refunds, for no business or apparent lawful purpose.
• Multiple accounts that receive a student aid refund are accessed from the same out-of-state or international IP address or the same device.
• Multiple accounts are created online within a short timeframe at a financial institution and receive student aid refunds.

FinCEN also explains that often the funds deposited in these accounts are rapidly transferred through peer-to-peer or wire transfers to other accounts, used to purchase digital assets, or used in transactions with online money service businesses that typically process international funds transfers.

Finally, FinCEN’s alert emphasizes the obligations banks and other financial institutions owe under the BSA to implement appropriate due diligence procedures and report suspicious activity. It urges entities that may be used in furtherance of FSA fraud schemes to take steps to detect such schemes, and to report any suspicious activity they identify.

While FinCEN’s alert does not suggest that its enforcement focus is on legitimate businesses whose products are subverted for unlawful purposes, it makes clear that this administration expects them to take affirmative steps to prevent fraud. Especially given FinCEN’s increased focus on student aid fraud, financial institutions should review their fraud detection and prevention programs to ensure they account for the patterns and red flags FinCEN has identified and that they fulfill their obligations under the BSA to detect and report suspicious activity.