The following assumes the OP was correct and in context and that the clmt doesn't have knowledge of the HB scheme.
On the face of it, it doesn't seem a likely candidate for "fraud". The only way this could be remotely possible would depend on the questions on the claim form and the answers to those questions.
So, onto the substantive issue.... Should the LA have known? Assuming the clmt properly disclosed details of the course and properly answered questions put to him/her, I concur with the other responses that the failure to take into account a loan was an error on the part of the LA error.
LAs cannot be expected to be experts in all matters beyond HB/CTB, but the "notional" student loan legislation is part of HB/CTB legislation and is unquestionably something that should be within the knowledge of HB/CTB assessors.
Once it is an error, it is only recoverable if the clmt contributed to the cause of the overpayment, or, could reasonably have been expected to realise s/he was being overpaid at either the time of payment OR at the time of any notice relating to the payment.
CH/4075/2003 may be highly relevant. In particular, look at paras 25 onwards. This CD is on its way to Rightsnet.
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