Loophole allows families to obtain aid meant for needy students

The U.S. Education Department is being urged to close a loophole that has allowed some wealthy families to get federal, state and university funding that’s meant to help needy students.

Federal authorities were notified last year that some parents in Illinois had transferred custody of their children to friends or relatives to make it appear they came from poorer backgrounds. In doing so, they became eligible for scholarships and federal grants that are typically reserved for low-income students.

Disclosure of the practice comes at a time of intense debate over the fairness of college admissions. Earlier this year, federal authorities say they uncovered a sweeping scheme in which wealthy parents paid bribes to get their children into elite universities across the nation.

The latest case was uncovered at the University of Illinois after guidance counselors at nearby high schools caught wind of the scheme and notified the school’s admissions office. University officials soon noticed a pattern of students coming from certain Chicago suburbs with recent guardianship transfers and similar language in their applications. In total, the school says it has identified 14 cases over the last year.

Andy Borst, director of undergraduate admissions, said that while the strategy appears to be legal, it’s ethically questionable. By tapping into funding for needy students, he said, wealthy families deprive students who legitimately need help. Some of the families were able to obtain state grants that are first-come, first-served, while thousands of other students were turned away.

“Financial aid is not infinite,” he said. “There are students who are eligible for need-based aid who are not receiving their awards because the state runs out.”

The Education Department’s inspector general said it’s aware of the issue and is urging the agency to add new language to its rules to close the loophole. Under the proposed update, changes of guardianship would not be recognized “if a student enters into a legal guardianship but continues to receive medical and financial support from their parents.”

A statement from the department said it’s weighing how to respond.

“Those who break the rules should be held accountable, and the department is committed to assessing what changes can be made — either independently or in concert with Congress — to protect taxpayers from those who seek to game the system for their own financial gain,” according to the statement.

The scheme, which was first reported Monday by Pro Publica and the Wall Street Journal, has been traced to clusters of parents in Chicago suburbs. It’s unclear how widespread the scheme reaches, but admissions and financial aid groups said they hadn’t heard of reports outside Illinois.

Some parents told Pro Publica and the Journal that they transferred custody of their children on the advice of a college consulting firm called Destination College, based in Lincolnshire, Ill. The company’s website promises to help parents pay for college “in the most efficient and inexpensive way.” The firm did not respond to a request seeking comment.

After having their custody transferred, students can claim they are independent of their families and apply for financial aid using their own earnings rather than their families’. That would typically qualify them for federal Pell Grants, which are capped at about $6,000 a year, and an Illinois state program that provides about $5,000 a year. It could also make them eligible for university scholarships that range as high as the full cost of tuition.