FinAid | Scholarships | Scholarship Scams

Scholarship Fraud Prevention Act of 2000

On Wednesday, October 6, 1999, the Senate Judiciary Committee held a hearing entitled Solving the Problem of Scholarship Scams to discuss S1455, The College Scholarship Fraud Prevention Act of 2000.

The bill was subsequently passed by both the House and the Senate and signed into law by the President as Public Law 106-420.

Four witnesses testified at the hearing in support of the legislation, including Mark Kantrowitz, publisher of FinAid; Sheila F. Anthony, Commissioner, Federal Trade Commission; Susan O'Flaherty, Western Michigan University; and Sanjeev Bery, U.S. Public Interest Research Group.

Transcript of Oral Testimony by Mark Kantrowitz

Mr. Chairman, I thank you for convening this hearing on the College Scholarship Fraud Prevention Act of 1999, and for inviting me to testify before the Senate Judiciary Committee this afternoon. My name is Mark Kantrowitz, and I am the publisher of the FinAid and eduPASS web sites, free resources that exist to aid students in navigating the sea of financial aid and to combat the type of fraud the Abraham-Feingold legislation addresses. The FinAid site had more than 2 million visitors last year. I am pleased to have the opportunity to share my experiences with the Committee today.

Every year, several hundred thousand students and parents are defrauded by scholarship scams. The victims of these scams lose more than 100 million dollars annually.

The most common types of scholarship scams include scholarships for profit and guaranteed scholarship search services. The first type charges an application fee for scholarships that never materialize or are less than advertised, or disburses less money in scholarships than is received from application fees. The second type charges a fee to match student information against a database of scholarships and guarantees that the student will actually receive money.

Scholarship scams succeed by giving families an unreasonable expectation of success in using their services to obtain financial aid. Several of the most common misrepresentations include:

The unclaimed aid myth, which falsely states that millions or billions in aid went unclaimed last year and promises to get the student their fair share. This is an extremely pernicious myth, because it not only defrauds consumers, but also suggests to private sector benefactors that there is no need for them to create new scholarships.

Bogus guarantees which often include restrictions that render them meaningless, such as requiring the student to submit rejection letters, or which include federal aid as part of the total.

False claims of government or Better Business Bureau approval. One scam even created its own bogus BBB. Others misrepresent the nature of their businesses by using an eagle in a formal seal as their logo, and words like "National", "Administration", "Foundation" and "Federal" in their names.

I support the College Scholarship Fraud Prevention Act because it addresses the problem through a combination of law enforcement and consumer education.

I would like to suggest a few ways in which the legislation could be enhanced:

In section 5, restrict the listings to organizations that provide information and services for free. The Higher Education Act already includes such a requirement. There are numerous high quality sources of free information about financial aid, including the FinAid, FastWeb, College Board, and Peterson's web sites.
In section 5, require the organizations to publish a privacy policy on their web sites and require the organizations to provide the consumer with the ability to opt out of any mailing lists as part of the registration process.
In section 5, allow the US Department of Education to exclude businesses which are being prosecuted by State Attorneys General, not just the FTC.
In section 5, give the US Department of Education broader discretionary power in determining which organizations should not be listed, since a listing on the ed.gov web site will be viewed by consumers as an implicit endorsement.
In section 5, add language directing the US Department of Education's consumer hotline, the Federal Student Aid Information Center, to provide similar information to consumers who call with questions about the legitimacy of a particular financial aid business.
Expand the language of the legislation to include organizations that provide information about student financial aid in addition to organizations that offer financial assistance.

An additional idea for improving the legislation concerns "scholarships for profit" or organizations that offer scholarships with an application fee. Students apply for these awards, thinking that the organization is involved in philanthropy, when in reality the organization is enriching itself through the application fees.

Philanthropy should be about giving money, not getting money. I recommend making it illegal to misrepresent what amounts to little more than a raffle as a scholarship by making it illegal to charge students fees to apply for scholarships. If they want to call it a scholarship or fellowship, they must not be allowed to charge students any fees.

Alternately, I would recommend requiring any organization that charges students an application fee for scholarships to disclose certain information on the application form and to the general public, including the number of applicants, the total application fee revenue, and the total amount disbursed in scholarships.

Mr. Chairman, I once again thank you and the committee for taking an interest in the issue of financial assistance fraud, and for inviting me to share my thoughts on the matter. I would be happy to answer any questions you may have.