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Avoiding College Scholarship Scams: What You Should Know

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Every year, thousands of students and parents are defrauded by scholarship scams. The victims of these scams lose more than $100 million annually. Scam operations often imitate legitimate government agencies, grant-giving foundations, education lenders and scholarship matching services. They often use official-sounding names containing words like “Federal,” "National, or " “Foundation.”

Fraudulent scholarships can take many forms. In general, be wary of scholarships with an application fee, scholarship matching services who guarantee success, advance-fee loan scams and sales pitches disguised as financial aid “seminars”.

If you receive an offer that uses one of these tactics, be suspicious.

  • Scholarships that Never Materialize. This scam requires you to send money up front. You receive little or nothing in exchange. Victims usually write off the expense, thinking that they didn’t win the scholarship.
  • Scholarships for Profit. This scam looks just like a real scholarship program, but requires an application fee. They typically receive 5,000 to 10,000 applications and charges fees of $5 to $35. They can then afford to pay out a few $1,000 scholarships and still make a healthy profit – if they award any scholarships at all.
  • The Advance-Fee Loan. This scam offers you an unusually low-interest educational loan, with the requirement that you pay a fee before you receive the funds. When you pay the money, the promised loan never comes through. Legitimate educational loans deduct fees from the disbursement check. They never require a fee when you submit an application.
  • The Scholarship Prize. This scam tells you that you’ve won a college scholarship, but requires that you pay a “disbursement” fee, “redemption” fee, or the taxes before they can release your award. If you are notified that you’ve won a prize and you don’t remember entering a contest or submitting an application, be suspicious.
  • The Guaranteed Scholarship Search Service. Beware of scholarship matching services that guarantee you’ll win a scholarship or they’ll refund your money. They may take your money and disappear.
  • Investment Required for Federal Loans. Insurance companies and brokerage firms sometimes offer free financial aid seminars that are actually sales pitches for insurance, annuities, and investment products. If a sales pitch implies that purchasing such a product is a prerequisite to receiving federal student aid, it violates federal regulations and state insurance laws.
  • Free Seminar. You may receive a letter advertising a free financial aid seminar. The seminars can provide some useful information, but often they are cleverly disguised sales pitches for financial aid consulting services, investment products, scholarship matching services, and high-interest student loans.

Certain signs can help you identify possible scams. The following signs do not automatically indicate fraud or deception. Look out for any organization that exhibits several of these signs and treat them with caution.

  • Application fees. Be wary of any “scholarship” which requests an application fee. Legitimate scholarship sponsors do not require an application fee.
  • Loan fees. If you have to pay a fee in advance of obtaining an educational loan, be careful. It might be called an “application fee”, “processing fee”, “origination fee”, “guarantee fee”, “default fee” or “insurance fee”. If it must be paid in advance, it’s probably a scam. Legitimate educational loans deduct fees from the disbursement check. They never require an up-front fee when you submit an application.
  • Other fees. If you must pay to get information about an award, apply for the award, or receive the award, be suspicious. Don’t spend more than a postage stamp to get information about loans and scholarships.
  • Guaranteed winnings. No legitimate scholarship sponsor will guarantee you’ll win an award. These “guarantees” often come with conditions that make them hard to redeem or worth less than they seem.
  • Everybody is eligible. All scholarship sponsors are looking for candidates who best match certain criteria. There are some scholarships that do not require specific conditions, but some set of restrictions always applies. No scholarship sponsor hands out money to students simply for being.
  • The unclaimed aid myth. You may be told that millions of dollars of scholarships go unused each year because students don’t know where to apply. This isn’t true. Most financial aid programs are highly competitive. There are no unclaimed scholarships.
  • We apply on your behalf. To win a scholarship, you must do the following: submit your own application, write your own essay, and obtain your own letters of recommendation. There is no way to avoid this work.
  • Claims of influence with scholarship sponsors. Scholarship matching services do not have any control over the awarding of scholarships by third parties.
  • High success rates. Overstated claims of success are a good tip-off to a scam. If something sounds too good to be true, it probably is.
  • Excessive hype. If the brochure or advertisement seems to exaggerate, be suspicious.
  • Requests for personal information. If the application asks you to provide bank account numbers, credit card numbers, or social security numbers, it is probably a scam. If they call and ask you for personal information, hang up immediately. This information can be used to commit identity theft.
  • No telephone number. Most legitimate scholarship programs include a telephone number for questions with their application materials.
  • Mail drop for a return address. If the return address is a box number or a residential address, it is probably a scam.
  • Masquerading as a federal agency. If you receive an offer from an organization with an official-sounding name, check whether there really is a federal agency with that name.
  • Endorsement by a university or government agency. The federal government, US Department of Education, and US Chamber of Commerce do not endorse or recommend private businesses.
  • If a financial aid “seminar” is held at a local college, don’t assume that it is sanctioned by the college. Call the school’s financial aid office to find out whether it is a school approved or sponsored event.
  • Suggesting that they are a non-profit organization when they are not. Don’t assume from an organization’s name that it has a charitable purpose. Any organization with “Fund” or “Foundation” in its name is not necessarily a charitable foundation.
  • Unsolicited opportunities. Most scholarship sponsors will only contact you if you’ve contacted them in some way. If you’ve never heard of the organization before, it’s probably a scam.
  • Failure to Substantiate Awards. If the organization can’t prove that its scholarships are actually awarded and given out, be cautious.
  • Typing and spelling errors. Materials that contain typing errors, spelling errors, or lack a professional appearance may be an indication of a scam.
  • Notification by phone. If you have won a scholarship, you will receive written notification by mail. They will not contact you by phone.
  • A newly-formed company. Most philanthropic foundations have been established for many years. If a company was formed recently, ask for references.
  • Gives you the runaround. Demand concrete answers that directly answer your questions.
  • A Florida or California address. A large number of scams seem to originate from Florida and California addresses.

There are some steps you can take to avoid scholarship scams:

  • Be cautious if fees are required. It is never in your best interest to respond to an offer with an up-front fee.
  • Get an independent opinion from a trusted source. Check with the financial aid office at a local college or university, a reference librarian, or your high school guidance counselor.
  • Check with Directory Assistance to see if the company has a phone listing. If they don’t, they’re unlikely to be legitimate.
  • Never give out personal information. Don’t give out your checking or savings account numbers, social security number, or other personal information – no matter how reasonable the request sounds.
  • Get it in writing. If you choose to use a scholarship search service, get offers, cancellation and refund policies, and guarantees in writing before sending money. Read all the fine print. Don’t rely on verbal agreements.
  • Don’t respond to unsolicited offers. Ignore offers that involve a time constraint. If the company demands an immediate response, it may be a scam.
  • Trust your instincts. If you feel uneasy about an offer, don’t spend any money until you’ve investigated your concerns. Your initial suspicious reaction is often correct.
  • Keep good records. Keep copies of your correspondence with the company and the company’s promotional literature. Take notes during any telephone conversations. If it does turn out to be a scam, include these materials when complaining to law enforcement agencies.

Many scholarship scams violate federal and state laws against fraud and false advertising. If you suspect that a scholarship program might be a scam, get a second opinion. Bring a copy of all literature and correspondence concerning the scholarship to your guidance counselor or your school’s financial aid office. They can provide you with accurate and current information and may be able to verify whether a foundation is legitimate.

To report a suspicious offer, write a letter summarizing your experience with the company to any of the anti-fraud organizations listed here. Be sure to include the details of your complaint, the steps you took to try to obtain satisfaction, and the company’s response. Provide as much information as possible. Include names, addresses, phone numbers, and copies of advertisements, letters and postcards. Include a copy of any notes you took during any telephone conversations with the company. Write down the date and time of the conversation, the name of the person with whom you spoke, and any important statements they made. Try to be as thorough as possible.

The following organizations can help you determine whether an offer is legitimate. They will tell you whether they have received any complaints about the company and whether it’s currently under investigation. They can also provide you with additional information or assistance.

  • The National Fraud Information Center (NFIC) can provide information and pass your complaints along to the appropriate authorities. They can be reached at 1-800-876-7060 or by writing to them at PO Box 65868, Washington, DC 20035.
  • The Federal Trade Commission (FTC) launched an ongoing crackdown on scholarship scams in 1996. To date the FTC has sued and reached settlements with a dozen companies and 31 individuals. The FTC does not handle individual cases, but can take action against a company when it sees a pattern of fraudulent activity. The FTC can be reached at 1-202-FTC-HELP (1-202-382-4357) or 1-877-FTC-HELP (1-877-382-4357).

The Scholarship Fraud Prevention Act of 2000 enhances protections against fraud in the offering of financial assistance for college education. It does so in three ways:

It increases the penalties for people who perpetrate scholarship scams.

It eliminates a loophole in the bankruptcy laws that allowed the scam artists to retain their profits by exploiting the homestead exemption.

It requires the US Department of Education , in cooperation with the Federal Trade Commission, to publish information about scholarship scams on its web site.

The penalties for people convicted of scholarship fraud include jail time and fines of up to $500,000.

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