How VO and Verifiable Credentials Help Universities Shut the Door on Financial-Aid Fraud and Phantom Enrolments

Executive Summary

US colleges and universities are in the middle of a quiet identity crisis: they’re enrolling and financially supporting students who don’t exist.

These “ghost students” are synthetic or stolen identities that move through online application, enrolment, and financial aid flows just like legitimate students. They sit in your SIS, consume course seats, trigger Pell and state aid disbursements, access your .edu digital ecosystem, and then disappear as soon as the money lands.

Recent investigations show:

• California community colleges alone have flagged over 1.2 million suspicious FAFSA applications, resulting in 223,000 phantom enrolments and at least $11 million in unrecoverable aid. Proof
• In a single year, California community colleges reported $13 million in financial aid stolen by ghost students, up 74% year-on-year. Insider
• The U.S. Department of Education’s Office of Inspector General has previously identified more than 85,000 recipients linked to student aid fraud rings, with over $874 million in questionable disbursements. U.S. Department of Education OIG
• Broader fraud in student aid programs is estimated at over $1 billion a year in the US. Cato Institute

At the same time, institutions are under pressure to grow enrolments, scale online and hybrid programs, and “reduce friction” for applicants. That combination—high volume, low friction, fragmented digital identity—has created ideal conditions for organized fraud rings using bots, AI-generated identities and stolen PII. EdTech Magazine+1

The result isn’t just lost aid money. Ghost students:

• Take real students’ seats in oversubscribed courses. CalMatters
• Inflate enrolment metrics and distort planning.
• Increase operational workload in admissions, financial aid, registrar, and IT.
• Expose institutions to regulatory scrutiny, federal clawbacks, and reputational damage. U.S. Department of Education+1

Existing controls—simple ID uploads, CAPTCHAs, knowledge-based checks, basic MFA on generic student accounts—were never designed to answer the core question: “Is there a real, unique human behind this enrolment and aid application, and is this the same person throughout the entire student lifecycle?”

This paper argues that ghost students are not primarily a “fraud analytics” problem, they are an identity assurance problem.

It then outlines how VO (www.idbyvo.com) and Verifiable Credentials (VCs) provide a structural fix:

• Strongly proofing student identity once, with cryptographic credentials bound to a real person.
• Re-using that trusted credential across application, enrolment, financial aid, LMS access, and graduation.
• Making fraud rings economically unviable by forcing each synthetic identity through high-assurance verification.
• Improving the onboarding experience for legitimate students while cutting manual review, re-verification, and help desk effort.

By treating ghost students as a systemic identity gap, universities can move from endlessly chasing fraud patterns to building a trusted student identity foundation that reduces risk, protects aid dollars, and improves the student experience.

1. What Are Ghost Students?

“Ghost students” are fake, synthetic or stolen identities that are enrolled as if they were real students—often in online or hybrid programs—primarily to obtain financial aid or exploit access to university resources.

A typical pattern looks like this: EdTech Magazine+1

1. A fraudster uses stolen or fabricated identity data to complete an online application.
2. The application passes automated checks and is admitted (especially in open-access community colleges or online programs).
3. The “student” applies for federal, state, and institutional aid (e.g. Pell Grants and loans).
4. They enrol in enough units (often fully online) to satisfy aid disbursement requirements.
5. Once aid is disbursed and refunds are issued, they disappear or drop out; in some cases, AI tools are used to keep them “just active enough” to avoid early detection.

Criminal networks now actively trade in FAFSA credentials and stolen identities, with “Pell runners” or “ghost students” used as operational jargon for those exploiting US financial aid systems. PBS+1

Ghost students can also:

• Abuse .edu accounts to access discounted or free SaaS tools, VPNs, research databases, or cloud credits. EdTech Magazine
• Inflate enrolment counts in franchise and partner arrangements, particularly in the UK and other markets where loan funding is attached to headcount. post18.co.uk+2Financial Times+2
• Be used in visa fraud schemes, where being “enrolled” is primarily about immigration status, not education. liffeycollege.ie+1

For this paper, we focus on the US higher education sector, with global examples where they illustrate that this is a structural issue in digitally mediated education systems is not an “American anomaly.”

2. The Scale and Trajectory of the Problem

2.1 US: A Billion-Dollar Fraud Vector

Multiple sources now converge on a sobering conclusion: ghost students represent a nine-figure annual fraud problem, with the potential to scale into the billions if unchecked.

Key data points include:

• The U.S. Government Accountability Office has estimated that taxpayers lose more than $1 billion annually to fraud and abuse in student aid programs. Cato Institute
• A US Department of Education OIG assessment identified over 85,000 recipients potentially involved in aid fraud rings, with more than $874 million in questionable disbursements. U.S. Department of Education OIG+1
• In California alone, community colleges have reported over 1.2 million suspicious FAFSA applications, 223,000 phantom enrolments, and at least $11 million in unrecoverable aid, with more than $10 million federal and $3 million state dollars lost in a recent 12-month period. Proof+1
• Reported stolen financial aid at California community colleges jumped from $3.3 million to $13 million over two years a nearly 4x increase as fraudsters scaled bot-driven enrolments. Insider+1

Recent estimates suggest ghost-student schemes are now a $180M-plus problem for US colleges and universities, with some news coverage warning that the overall “ghost college student scam” is approaching the billion-dollar mark. KTUL+3equifax.com+3WKEF+3

Importantly, most experts agree that detected fraud is only the visible portion of the problem. Fraud rings are adaptive; as controls improve in one part of the system, they shift cohorts, states, and institution types.

2.2 Institutional Case Examples

A few illustrative cases highlight the operational impact:

• Pierce College (Los Angeles) reported enrolment dropping by almost 36% (from 7,658 to 4,937 students) once ghost students were purged from the rolls—showing how deeply they had infiltrated reported enrolment. EdTech Magazine
• Fullerton College identified nearly $1 million in financial aid payments that would have gone to ghost students had officials not intervened in time. intelliboard.net
• In multiple OIG investigations, fraud rings used stolen identities to enrol “students” who never attended classes at all but successfully obtained Pell Grants and refunds. governmentattic.org+1

Recent criminal cases (e.g. multi-year fraud targeting Excelsior University and other online schools) show schemes operating for a decade or more before full exposure. Times Union

2.3 Global Context

While the US student aid system is uniquely generous, similar phenomena are emerging globally:

• The UK’s National Audit Office and press investigations have identified large-scale loan fraud tied to “ghost students” in franchised university programs, with millions in fraudulent loans disbursed and allegations that many students never attend. post18.co.uk+2The Times+2
• Australia and Ireland have reported “ghost student” visa scams where individuals enrol nominally in language or private colleges but do not study, using student status primarily for work or migration purposes. IBAT Dublin+3liffeycollege.ie+3monitor.icef.com+3

The pattern is consistent: wherever funding, immigration status, or benefits attach to an “enrolled student” record, identity fraud follows.

3. Why Ghost Students Exist: Process and Technology Gaps

Ghost students are not exploiting obscure loopholes; they are exploiting standard operating procedures that were never designed for a digital-first, fraud-as-a-service world.

3.1 Fragmented Identity Lifecycle

A typical university’s student identity lifecycle is fragmented across:

• Applications and admissions
• Financial aid processing
• Enrolment and registration
• Learning management systems (LMS) and classroom tools
• Student services and IT accounts

Each stage often has its own systems, practices, and controls. Identity is “re-established” multiple times with weak linkage between them:

• Application systems may only require a name, date of birth, Social Security Number (SSN), and an uploaded ID document.
• FAFSA and state aid portals may rely on similar data plus passwords or knowledge-based authentication. Inside Higher Ed+1
• The campus identity provider (IdP) issues credentials based on SIS data, which may assume upstream verification is sound.

Fraud rings exploit these seams:

• They can use the same stolen identity to apply to multiple institutions and programs.
• Synthetic identities can be rapidly generated and iterated until they pass simple checks. Persona+1
• There is no persistent, cryptographically bound link between the “person” and every subsequent use of their student status.

3.2 Low-Friction, High-Volume Digital Onboarding

The move to online and hybrid education dramatically scaled application volumes. Institutions, rightly, optimized for fewer barriers:

• Online forms instead of in-person enrolment
• Remote proctoring instead of physical exam halls
• E-signatures and self-service portals instead of counter visits

During the pandemic and after, traditional in-person identity checks were replaced with remote processes—often without equivalent rigor. Biometric Update+1

Fraudsters took note:

• Bots can now auto-complete application forms and FAFSA submissions at scale. San Francisco Chronicle+2Fortune+2
• AI tools can generate convincing writing samples and discussion posts, keeping ghost students “above water” in online courses just long enough for aid disbursements. CalMatters+1

3.3 Misaligned Incentives and Limited Resources

Institutional teams are under pressure to:

• Convert more applicants to enrolled students.
• Improve time-to-decision and time-to-aid.
• Avoid adding friction that might disadvantage legitimate low-income or first-generation students.

At the same time, fraud prevention budgets and staff capacity are limited. Many colleges simply cannot manually review large volumes of high-risk applications.

This creates the core tension:

“We need to verify that every aid recipient is a real, unique student, but we can’t afford to slow everyone down to do it.”

Without a re-usable, high-assurance digital student identity, universities are stuck choosing between fraud risk and friction.

4. Why Current Security Measures Are Not Enough

Most higher-ed institutions have already deployed some combination of:

• CAPTCHA and bot detection on application portals
• Document uploads for government ID
• Simple identity checks by financial aid officers
• Single sign-on (SSO) with multi-factor authentication (MFA) for student accounts
• Fraud analytics and anomaly detection in aid processing

These controls help, but they share critical limitations.

4.1 Point-in-Time Proof, Not Persistent Assurance

Document verification and manual ID checks typically happen once usually at admission or aid application. After that, the system assumes:

“If they were good enough to enrol, they’re good enough for everything else.”

But identity fraud is not static:

• Fraud rings may use legitimate but unwitting “straw students” who share their data in exchange for a cut of aid funds. EdTech Magazine+1
• A stolen identity may be discovered and reused by multiple rings across institutions.
• A ghost student’s credentials may be sold or transferred after initial verification.

Without a persistent, cryptographic credential bound to the verified person, current systems cannot reliably answer: “Is this the same human who was originally verified?”

4.2 Generic Accounts and Weak Binding

Traditional student accounts (NetID + password + optional MFA) are:

• Issued based on SIS records rather than real-world identity.
• Often shared between individuals (e.g., family member “helping” a student or outright sale of access).
• Protected by factors (passwords, SMS codes) that are themselves vulnerable to compromise or sharing.

This means that even if the initial verification was correct, the ongoing binding between account and person is weak.

4.3 Regulations Are Catching Up but not Sufficient

Recognizing the scale of the problem, the US Department of Education has announced heightened identity verification requirements for federal student aid, including: fsapartners.ed.gov+1

• Stronger identity proofing for Pell Grant recipients, often via live video with government ID.
• New ID verification vendors and processes tied into FAFSA and institutional workflows.

These steps are important, but:

• They primarily focus on front-end FAFSA verification, not the entire student lifecycle.
• They risk increasing friction for vulnerable student groups if not implemented carefully.
• They do not inherently provide portable, re-usable credentials that can be consumed across multiple institutional systems.

In other words: regulations are raising the floor, but institutions still need their own identity-centric architectures to fully close the ghost student gap.

5. The Cost of Doing Nothing

If universities treat ghost students as “just another fraud bucket,” the trajectory is clear.

5.1 Financial Impact

For a mid-size institution:

• Assume $80M/year in total aid disbursements (federal, state, and institutional).
• Using a conservative 2–4% fraud or error rate, consistent with historical Pell and loan overpayment estimates, biosigweb.azurewebsites.net+1 this implies:
• $1.6M–$3.2M/year in potentially fraudulent or erroneous disbursements.
• Add operational costs: extra staff time, investigations, remediation, systems effort and easily hundreds of thousands more per year.

At scale, sector-wide, you converge on the $1B+ annual burden flagged by GAO and others. Cato Institute+1

5.2 Operational and Academic Impact

Ghost students also:

• Block real students from enrolling in needed classes (especially high-demand gateway courses), delaying progression and graduation. CalMatters+1
• Distort academic analytics and planning—course success rates, engagement metrics, and program viability appear worse or strange.
• Add noise to early-warning and student-success systems that depend on accurate attendance and engagement signals.

Faculty and staff feel this as:

• “Dead” students on the roster who never appear or participate.
• Increased administrative work chasing down no-shows and reconciling grades and attendance.

5.3 Regulatory and Reputational Risk

As ghost student fraud becomes a political issue, expectations are rising:

• State systems (e.g., California) are under intense media and legislative scrutiny for multi-million-dollar fraud losses. CalMatters+1
• Law enforcement and OIG investigations can trigger audits, clawbacks, and corrective action plans that consume leadership bandwidth for years. U.S. Department of Education+1

No institution wants to be the headline: “University X loses millions to ghost students.”

Yet without structural changes, probability increases every year as fraud tooling evolves.

This is the “rational drowning” moment: your existing processes, no matter how diligent, will not keep pace with industrialized fraud.

6. A Different Answer: Verifiable Credentials as the Student Identity Backbone

To truly address ghost students, universities need to flip the problem:

From:

“How do we catch bad applications and suspicious behaviour?”

To:

“How do we prove, once and for all, that each student identity corresponds to a real human and then reuse that proof everywhere?”

This is where Verifiable Credentials (VCs) and VO come in.

6.1 What Is a Verifiable Credential?

At a high level, a verifiable credential is a cryptographically signed bundle of claims about a person (e.g. name, date of birth, student ID) issued by a trusted authority, which can be:

• Stored by the individual (e.g. in a secure wallet or app).
• Presented to others (universities, aid providers, partners).
• Verified instantly, without re-gathering documents or repeating manual checks.

This concept is aligned with W3C Verifiable Credentials standards and modern digital identity frameworks.

6.2 What Is VO?

VO is a platform that:

• Orchestrates high-assurance identity proofing using modern signals (ID document checks, biometrics, fraud analytics).
• Issues workforce or student verifiable credentials that bind identity to a cryptographic key or wallet.
• Integrates with identity providers (IdPs), LMS, SIS, CRM, and other systems to reuse that verifiable credential across the lifecycle.
• Provides fine-grained lifecycle controls—issuing, updating, revoking and auditing credentials as a student’s status changes.

While VO is widely positioned for workforce and verified help desk use cases, the same model applies directly to student identity.

7. How VO Fits into the Student Lifecycle

Below is a conceptual view of how VO and verifiable credentials can be introduced into a typical university student lifecycle to eliminate or drastically reduce ghost students.

7.1 Pre-Application & Application Stage

Current state: Anyone with sufficient PII can submit an application online. Identity checks are basic and point-in-time.

With VO and VCs:

High-assurance identity proofing

• Prospective students are directed (from application or FAFSA flows) into a VO-powered identity proofing step.
• They present government ID, complete liveness checks, and are screened against fraud indicators.

Issuance of a “Prospective Student” Verifiable Credential

• Once verified, VO issues a prospective student credential containing core identity attributes.
• The applicant can then share this credential with one or more institutions.

Application binding

• The university application system only accepts applications linked to a valid verifiable credential.
• Multiple applications from the same underlying identity (to many programs) can be tracked and risk-scored appropriately.

Impact:

Ghost students now need to pass high-assurance identity proofing before they even become an “applicant.” Synthetic identities and large-scale bot applications become dramatically more expensive to orchestrate.

7.2 Admissions & Offer Acceptance

With VO and VCs:

• When admitting, the institution trusts the identity asserted in the verifiable credential instead of relying solely on self-reported data.
• The offer of admission can itself be turned into a university-issued verifiable credential (e.g. “Admitted Student – Fall 2026”) linked to the same identity, building a chain of trust.

7.3 Financial Aid and Billing

Current state: FAFSA/aid systems often re-collect similar data, with separate ID checks that may not be tightly coordinated with institutional identity management.

With VO and VCs:

• The student authorizes sharing their verifiable credential with financial aid systems (internal and external).
• Aid officers and automated systems can validate:
• That this credential was issued by a trusted identity proofing workflow.
• That the identity has not been flagged as high-risk or linked to previous fraud rings.
• VO can orchestrate step-up verification for high-risk patterns (multiple aid applications from same device cluster, unusual geolocation, etc.).

Impact:

Aid is disbursed only when there is strong, cryptographically verifiable assurance that one real human stands behind each student record.

7.4 Enrolment, LMS & Campus Access

Once the student is confirmed, VO integrates with the institution’s IdP:

• The university issues a “current student” verifiable credential (or updates the existing one) with attributes such as program, term, and enrolment status.
• The student’s SSO account is bound to this credential; logins can be checked against the VC as part of authentication flows.
• Changes in status (withdrawal, leave of absence, completion) are written back into the credential and propagated to downstream systems.

Result:

• Ghost students cannot simply disappear after disbursement; their status and behaviour are visible across systems.
• When enrolment is revoked, access is revoked everywhere, reducing abuse of .edu resources by non-students.

7.5 Graduation and Alumni

Finally, verifiable credentials become the basis for:

• Digital degrees and transcripts.
• Alumni access credentials.
• Cross-institution credentials for graduate or professional study.

The same infrastructure that blocked ghost students at the front door now becomes a positive enabler for legitimate students’ long-term digital identity.

8. What This Means for a University: Operations, Experience, and Financials

8.1 Operational Impact

Implementing VO and verifiable credentials would:

• Reduce manual identity checks in admissions and financial aid by replacing them with standardized, auditable identity proofing up front.
• Simplify investigations: when a suspicious pattern emerges, investigators can trace it through a single identity backbone rather than across disconnected systems.
• Provide a single source of identity truth for students, usable by IT, Registrar, Finance, and Security.

Typical integration touchpoints include:

• Identity provider (SSO/MFA)
• SIS and CRM (application and enrolment records)
• Financial aid systems
• LMS and exam proctoring tools

Because VO is an orchestration layer rather than a rip-and-replace system, universities can adopt it incrementally, for example, starting with high-risk online programs or specific aid cohorts.

8.2 Student Experience

Paradoxically, stronger identity assurance can be a better experience:

• Students prove their identity once to a high standard, then reuse it across:
• Multiple applications
• Aid processes
• Campus services and exam access
• Less need to repeatedly upload documents, answer knowledge-based questions, or visit offices in person.
• Faster time from application to enrolled + funded, because high-assurance signals reduce the need for manual exception handling.

For first-generation and low-income students, this can mean less bureaucratic friction and anxiety, not more, provided the UX is well-designed.

8.3 Risk Reduction and Compliance

From a CISO, CIO, or Chief Compliance Officer perspective, VO-enabled verifiable credentials:

• Provide strong evidence to regulators and auditors that the institution has proactively addressed identity-related fraud risks, aligning with federal expectations for fraud risk management in large programs. gao.gov+1
• Reduce exposure to clawbacks and corrective actions tied to breakdowns in identity verification.
• Improve alignment with digital identity assurance frameworks (e.g., NIST 800-63-3 style thinking) without requiring universities to become identity-proofing experts themselves.

8.4 Financial Impact: An Illustrative Model

Consider again a mid-sized US institution:

• 18,000 students (headcount)
• $80M/year in total aid disbursed

Assume:

• Conservative 2% fraud/error exposure on aid disbursements = $1.6M/year
• VO + verifiable credentials could reasonably prevent half or more of identity-driven fraud (ghost students and rings).

Savings from fraud reduction alone:

• $800k–$1.2M/year

Add:

• Avoided staff time (aid and admissions manual reviews, investigations): say $250k/year equivalent.
• Improved course seat utilization and retention (harder to quantify, but even a small improvement in real-student retention and completion has high revenue impact).

Total potential annual benefit: easily in the $1M–$1.5M range for a single institution, with upside if current fraud exposure is higher than assumed, something many community colleges in high-fraud states are already seeing. CalMatters+2Insider+2

Against this, you weigh:

• VO platform and verification costs (identity proofing + orchestration).
• Integration and change management effort.

9. Beyond Ghost Students: A Platform for Trusted Digital Education

Once universities have a verifiable credential foundation in place, new opportunities open:

• Visa and international student integrity
• Use the same credentials to strengthen visa compliance and reduce exposure to “ghost student” migration scandals. liffeycollege.ie+1
• Micro-credentials and lifelong learning
• Issue portable, verifiable micro-credentials and digital degrees that employers can trust.
• Work-integrated learning and workforce transitions
• Link student verifiable credentials with workforce verifiable credentials (VO’s core strength) as graduates enter employment, enabling smoother background checks and onboarding.
• Cross-institution collaboration
• Use verifiable credentials to support cross-registration, shared online programs, and consortium models, while keeping fraud risk under control.

In other words, solving the ghost student problem can be the first step in building a broader trusted digital identity ecosystem for education and work.

10. From Fraud Project to Identity Strategy

Many institutions are currently approaching ghost students as a fraud analytics project:

• Improve detection rules
• Purchase a new fraud management tool
• Hire more investigators

Those are necessary but insufficient. The reality is;

Ghost students are a symptom of a deeper structural issue: we do not have a persistent, verifiable digital identity for each student.

Acknowledge the real scale of risk

• Use your own data (aid disbursements, no-show rosters, flagged applications) to quantify exposure.

Recognize that traditional controls cap out

• You can’t manually review your way out of a bot-driven, AI-powered fraud economy.

Adopt verifiable credentials as a foundational control

• Make high-assurance identity proofing and reusable credentials a non-negotiable for online and aid-eligible enrolment.

Leverage VO to orchestrate, not replace

• Use VO to connect existing systems—SIS, IdP, LMS, financial aid—into a coherent, identity-centric architecture.

11. Next Steps for Universities Considering VO

For leaders in enrolment, finance, IT, and security, a pragmatic path might look like:

Baseline Assessment

• Quantify suspicious applications, no-shows, aid chargebacks, and OIG/DOE interactions over the past 3 to 5 years.
• Identify high-risk programs (fully online, open-access, high-aid cohorts).

Pilot Scope Definition

• Choose one or two high-risk populations (e.g., online community college programs, certain aid cohorts) to pilot VO-powered verifiable credentials.

Integration Design

• Connect VO to your IdP and SIS first; then extend to financial aid and LMS.
• Define what “must be verified” before:
• application acceptance
• first aid disbursement
• continued access to key systems

Student-Centric UX Design

• Co-design onboarding flows with student services to ensure they are inclusive and accessible.
• Provide clear explanations for why identity proofing is being strengthened and how it protects legitimate students.

Measure and Iterate

• Track metrics such as:
• Reduction in suspicious applications and ghost enrolments
• Reduction in aid write-offs and chargebacks
• Time-to-enrolment and time-to-aid for legitimate students
• Use these metrics to refine policies and expand coverage.

Conclusion

Ghost students are not a niche cyber issue, they are a core strategic risk to the financial, academic, and reputational health of US higher education. The data now shows a problem measured in hundreds of millions of dollars, growing quickly, and increasingly fuelled by AI and industrialized fraud networks.

Traditional controls like forms, document uploads, CAPTCHAs, generic MFA, and after-the-fact analytics—cannot keep up. The underlying problem is that our systems still treat “student identity” as a loosely coupled set of records, rather than a cryptographically provable, persistent relationship with a unique human being.

VO and verifiable credentials offer a way out:

• Eliminate or drastically reduce ghost students by making high-assurance identity proofing and verifiable credentials prerequisites for enrolment and aid.
• Improve student experience by replacing repeated low-value checks with a single, reusable identity step.
• Protect institutional and taxpayer funds, strengthen compliance posture, and reduce operational drag.
• Lay the foundation for a trusted digital ecosystem that supports lifelong learning, workforce transitions, and global mobility.

The institutions that act now will not only close a serious risk gap—they’ll also be better positioned to compete in an increasingly digital, global, and trust-sensitive higher education landscape.