Local government officials claim there is evidence of 'organised fraud on a large scale' being carried out on several London borough councils.
Council taxpayers may face increased bills as the Government is unlikely to reimburse local councils who paid out fraudulent grants.
Tory-controlled Brent council in north-west London has set up an urgent investigation after an internal audit team uncovered up to 200 illegal claim forms, costing an average of pounds 4,000 each.
Bob Blackman, the council leader, said: 'Were it not for our system of performance reviews I doubt whether this fraud would have come to light. We do not know how long it has been going on.'
Other London councils said to hae been targeted included Waltham Cross.
A report submitted to councillors by George Benham, Brent's education chief, said: 'It became apparent that organised fraud on a large scale throughout London was being perpetrated. It is difficult to be precise about the extent. Up to 200 applications could have been made to the council.'
Brent has brought in extra auditors to carry out checks on false applications to minimise delays on grant payouts. Payments to as many as 4,000 genuine students from the borough have been delayed since the start of the autumn term in October.
It is feared many students may already be in debt because their pounds 3,000 maintenance grants, provided to cover living expenses, are being held up as the council has insufficient staff to review all the cases of suspected fraud.
Outside consultants will be used to avoid disrupting the work of the council's own Internal Audit Unit, which uncovered the fraud.
They will review every one of the tens of thousands of grant applications to make sure they are genuine.
Mr Benham said the council was aware of 80 cases requiring immediate investigation after information was received from police and other sources.
He warned the fraud could cost the council pounds 2.4m if grants were paid out fully over three years of study.
He described the figure as a 'worst-case scenario' as fraudsters would have to provide evidence that they had completed their first year of study.
If the figure is correct it could add pounds 20 to council tax bills in Brent as councils have a statutory duty to ensure awards go to eligible people. Brent councillors have been warned that the Government, which would normally reimburse the cost of grants, would not repay cash lost through illegal claims.
Moore Giwa, Labour education spokesman on the council, said: 'It is very unfair on the students they should have to suffer because of this fraud. I hope the position will be sorted out as quickly as possible so that they can get their money as soon as possible.'
Mr Blackman said computerisation of the grant award system - currently being carried out - would make it easier in future to prevent frauds.Reuse content