The report from the accountants Price Waterhouse commissioned by the Department for Education says that both universities and local authorities, who process grants, fail to pursue fraudsters with enough rigour.
Gangs are inventing identities and using false names and addresses to submit applications for grants at several universities at a time. They target new universities just before the start of the academic year when institutions are desperate to fill their empty places. Once accepted, "students" turn up with forged documents to collect their grant cheque.
Local authorities say that one fraudulent applicant was caught after travelling the country to collect maintenance grant cheques from 30 universities. Another was found with 60 birth certificates, 17 marriage certificates and 14 British passports.
Universities, the report says, have no incentive to chase them because they receive fees for each student registered. "If fraud is discovered, then it will reduce the level of fee income to the university and potentially result in courses being cancelled."
The same is true of local authorities, who have to foot the bill if fraud is discovered. "There is an incentive not to be too rigorous in following up detected frauds after the payment has been made because it is the local education authority that will suffer the loss. If the fraud is not reported then the Department of Education will bear the cost of the hidden fraud."
The fraudsters' task is made easier, according to insiders, because interviewing for university places is now rare. And some bogus students are able to collect several instalments of their grant because some universities do not make regular attendance checks.
The report, delivered to the Government last autumn, says that a student claiming to have dependents and to attend a university in London could receive pounds 4,5000 over two terms. The total grant bill is more than pounds 1bn.
Price Waterhouse's calculations of undetected fraud are based in the amount of known fraud. The firm received completed questionnaires from 100 local authorities and visited some councils.
A national database of all student applications, the authors estimate, could mean savings of between pounds 6m and pounds 13m in the first two years.
Both local authorities and the Universities and Colleges Admissions Service (Ucas) operate fraud checks. The latter has a computer programme which spots inconsistencies and duplication in applications. Since 1992, according to the report, pounds 26m of student fraud has been prevented.
Geoff Davies, a Staffordshire's student awards officer, said: "Ucas has a very good system and we are beginning to check with other authorities whether they have received duplicate applications. But it is difficult to flush out everyone. Some of these people are applying using 40 different names. We are considering new procedures all the time."
The problem is compounded by universities who bypass the Ucas system and admit students who apply direct.
David Whitbread, head of education at the Local Government Association, said: "It would be unfair to assume that local authorities deliberately close their eyes to this. We have done a lot of work on preventing student fraud but authorities are unlikely to put a team onto it when they have to foot the bill."Reuse content