While serving nine months in a South Carolina prison on forgery charges, Michelle N. Owens capitalized on the explosion in online higher education to tap into a new — and highly lucrative — way to profit from fake documents.

Using information she gathered as she handled paperwork in the prison’s education department, Owens filed applications for admission and financial aid to Webster University’s distance-learning programs on behalf of 23 unknowing inmates. The applicants were admitted and granted the $467,500 in requested aid, including $124,821 for books, transportation and living expenses — though of course their room and board was provided by the state. The aid was sent in the form of debit cards to the residential South Carolina address Owens supplied.

An alert employee at Webster in St. Louis, which has campuses overseas and on dozens of United States military bases, eventually noticed an unusual number of applicants from the same address in Florence, S.C. Owens, 36, who continued to make fraudulent applications to Webster for more than a year after she was released from Leath Correctional Institution in 2008, was sentenced Sept. 29 to 51 months in federal prison and ordered to pay $128,852 in restitution.

She is one of 215 participants in 42 financial aid fraud rings who have been convicted since 2005 and ordered to pay $7.5 million in restitution and fines, according to a new report by the Department of Education’s Office of the Inspector General. But those numbers do not reflect the scale of the fraud rings, the report said, since often the ringleaders are the only ones prosecuted.

With the huge expansion of online college courses, financial aid scams have become a serious problem: As of Aug. 1, the inspector general had opened 100 investigations into distance-education fraud involving thousands of suspects; such crimes now make up about 17 percent of the agency’s open cases, and investigators are working on 49 new complaints, scrambling to keep up.

"Because of the sheer volume of referrals, finite resources and other external limitations," the report said, "we cannot investigate all of the referrals we receive concerning distance-education fraud rings."

The rings generally seek federal aid for "straw students" who have no intention of pursuing an education — or, as in Owens’ scheme, are unaware of the application. The aid is sent to the college, which takes the portion covering the initial tuition and fees, and then "refunds" the excess to the student to cover other expenses such as books, transportation and room and board.

Some rings involve vast cadres of foot soldiers, many of them lacking a high school diploma, recruited with the understanding that they will keep a portion of the aid money and kick back the rest to the ringleader.

Until 2005, colleges could not participate in federal aid programs if more than half their students were enrolled in what were then known as "correspondence" or "telecommunications" courses. For online courses — but not correspondence courses — the 50 percent rule was eliminated in 2005.

By now, the vast majority of colleges and universities offer online courses, and some huge commercial institutions have hundreds of thousands of online students. Amid tough economic times, an increasing number of these students are actually what are known as "Pell-runners" — people who disappear as soon as they receive the proceeds of their Pell grants or student loans.

Kathleen S. Tighe, the inspector general, suggested that colleges clamp down on identity verification, and that Congress and the Education Department rethink whether online students, mostly working adults, should be eligible for the same federal aid to cover living expenses as students who attend on-campus programs.

"Without that money there would be significantly less incentive for this particular scam," Tighe noted. "We’ll do the best we can with our resources to investigate the allegations we receive, but there are actions that can be taken to help reduce the appeal of this quick-cash-for-little-effort scam."

Community colleges have been especially vulnerable to fraud rings, because of their open enrollment and low tuition, which leaves room for substantial excess aid. At Rio Salado College, an online community college in Arizona, 64 people were convicted in a $538,000 scheme that unraveled after an employee in Rio Salado’s financial aid office noticed similar handwriting on several applications. The ringleader, Trenda Halton, a student who pleaded guilty last year, worked with several accomplices who recruited "straw students" to apply for Pell grants and loans. Halton signed into their online classes to meet Rio Salado’s attendance requirements, then took a cut of $500 to $1,000 once the aid money came through.

(Rio Salado has a business partnership with The New York Times Co. to offer courses through the company’s online education program.)

Pursuing so many people in an individual ring is rare, though.

"It is unlikely that such a robust effort to prosecute all participants in such a large investigation will be repeated in the future," said the inspector general’s report. In a similar case two years ago, American River College, a community college in Sacramento, found dozens of people with the same address enrolled in the same courses, all of them then withdrawing or failing. The ringleader pleaded guilty to fraudulently applying for federal financial aid for more than 60 people, and, in May, was sentenced to five years and 10 months in prison, and ordered to pay $234,515.

The biggest fraud, along with the most significant efforts to combat it, seems to have occurred at Axia College, a two-year program of the University of Phoenix, the nation’s largest for-profit institution. Officials there have identified — and referred to the inspector general — some 750 rings involving 15,000 people.

Axia, which enrolls about 150,000 students, and the University of Phoenix’s parent company, the Apollo Group, have four employees working full time to identify fraud and expose Pell-runners. "We have been able to construct a pretty thick net that is very difficult for these criminals to penetrate," said James Berg, the Apollo Group’s chief ethics and compliance officer.

Apollo monitors and records the vast majority of calls from potential students, he said, and has what he called an "intense identity verification process" if any red flags are raised. The company is also on the lookout for multiple applications from the same computer network address, often a tip-off to a fraud ring.

Last year, Apollo introduced a required three-week orientation in hopes of weeding out students likely to drop out. Axia’s new enrollment has since dropped by about half; Berg said the orientation had also cut down sharply on fraud.

"Fraud ringleaders, operating on behalf of several students, have to maintain the appearance that they’re all participating in orientation, and that’s just too much work for the ringleader," Berg said.

"We’ve heard back from ringleaders that the University of Phoenix is making it too difficult for us. And since the beginning of 2011, on a monthly basis, we have seen a decrease in the number of fraud rings we are flagging. I think with all the cases we’ve referred to law enforcement, word has gotten out that this is not a smart thing to try here."

© 2011 The New York Times Company