A letter to vice-chancellors from university admissions officials says students are inventing identities and using sophisticated computer forgery to claim both grants and loans.
Last year, 700 bogus applicants were traced, saving the public £1.5m, but the Universities and Colleges Admissions Service (Ucas) believes there may be thousands more.
Tony Higgins, chief executive, writes: "The fraud to which I currently refer is of a criminal nature and is on a massive scale. Basically it takes the form of either individuals, or more usually, organised groups, submitting applications on behalf of people who do not exist.''
Now that interviews for university places are exceptional, fraudsters simply turn up with their forged documents to register and collect the grant. Then they apply for a loan.
Provided that there are not too many checks on attendance during the first year, they then collect instalments of grant at the beginning of each term.
Mr Higgins said last night: "This is big business. An individual will register at perhaps half a dozen universities on the same day and then collect the grant. They have computer equipment producing high quality examination and birth certificates."
Many universities, says Mr Higgins, do not require attendance at a specified number of lectures or completion of a number of pieces of work before students are allowed to proceed to the next term. He says the fraud, originally confined mainly to London, is now spreading.
Many universities and colleges have already checked their records and found they have a number of registered students who do not exist or do not have the qualifications they claim.
Ucas is using a £120,000 government grant for computers to check the details of all students against details of those who have already been proved fraudulent. It also suggests adopting a code of practice for checking identity and qualifications.