An Orange County prosecutor said 63-year-old Carla Brennan offered to help friends of her children get money for college, and then took out loans in their names.
The students, ages 17 to 23, said they met her at a bank with the checks, gave them a small portion of the money and took the rest.
Prosecutors said Brennan stole $262,000 from five students in 2007. They also claim Brennan stole the identities of two people and made them loan co-signers.
The defrauded students became suspicious when they began receiving loan bills and notices of default.
"If it is proven true, it is kind of despicable that she would take advantage of some unsuspecting children. They're fresh out of high school, young, naive about the world and really don't have the experience with finances we do as an adult," said O.C. Deputy District Attorney Marc Labreche.
Prosecutors said Brennan was using the money to pay restitution in a prior tax fraud case.
She was arrested Tuesday and remains jailed. She has been charged with grand theft, identity theft and money laundering and could face more than 16 years in prison if convicted.
The Associated Press contributed to this report.