As much as $450 million (pound;313m) was stolen or mismanaged in the past three years, investigators say. Some of the lost money has been recovered, and at least seven people have been charged with various crimes in relation to the scandal, which officials conceded may reach even deeper.
"No one could ever give you a total number for how much fraud has occurred," said Lorraine Lewis, inspector-general in the USeducation department.
A financial accounting system adopted only three years ago at a cost of millions was blamed for making at least $250m (pound;174m) in mistaken duplicate payments to school board and school districts.
Employees also filed for false overtime pay at an estimated cost of $600,000, charged $1m worth of unauthorised expenses, and stole about $300,000 worth of electronic equipment, investigators say.
A small ring of department employees allegedly stole $1.9 million that had been meant for two rural midwestern school districts and used it to buy real estate near Washington, and two luxury cars.
Congressman Pete Hoekstra, who chairs the subcommittee that oversees the department, said it was "in total disarray" financially.
A spokeswoman for new education secretary Rod Paige said he would impose dramatic changes on the department and try to win back public confidence. The department has a budget of $44.5bn and oversees a similar amount of money that goes to student loans for university tuition.