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How to Spot College Loan and Scholarship Scams

If you’re on the hunt for scholarships, student loans, or grants–beware! Scam artists are on the prowl for vulnerable students. The more you know, the better you can protect yourself. Here are some common college loan and scholarship scams, and how you can avoid becoming a victim.

According to FinAid, a Web-based nonprofit resource for college students seeking financial aid, victims of college scholarship scams lose $100 million annually to scam artists posing as legitimate grant foundations, scholarship matching services, or government agencies. Here are three of the more common ways con artists use to trick students.

Scholarship: Application Fee Required
Any scholarship application promising impressive results that requires a fee should raise a red flag. Even if the fee seems nominal in comparison to the potential return, don’t be fooled. The most common schemes charge an application fee running anywhere between five and thirty-five dollars. Applicants fill out the application and send a check. The scholarship never materializes and the check disappears. Even for a poor student, thirty-five dollars may seem a small loss. To the scammers, however–who receive between 5,000 and 10,000 applications at a run–those “nominal” fees can add up to a big haul.

The Advance Fee Loan
The Advance-Fee Loan is another common scam. In this game of bait-and-switch, scammers pose as lenders, offering a student loan package with an impossibly low interest rate. The only catch? Before disbursement, the lender requires you to send in a “processing fee.” Other phony lenders may ask you to pay the tax on your loan up front. Don’t be fooled. If you mail off a check, you’re unlikely to get anything in return.

You’ve Won! Bogus Scholarship Prizes
Imagine this scenario: you open the mailbox one day to find you’ve won a scholarship worth thousands of dollars! True, you can’t remember entering the contest, but you’re overjoyed. As you scan down the fine print, you discover that a disbursement fee is required before you can collect the money. An uneasy feeling comes over you: the prize is substantial, certainly a modest fee is no big deal, right? Wrong. Remember, small fees, multiplied by thousands of victims, can add up to big bucks for con artists.

The variations continue. Some insurance companies or brokerage firms offer purported financial aid “seminars”–in reality, nothing more than shady pitches for insurance or investment products. Other scammers bill themselves as scholarship search services and boast money-back guarantees. At best, they may send you a list of qualifying scholarships–more likely, they’ll take the money and run.

How to Protect Yourself
By now, you’ve probably noticed the common thread: if you have to pay for money, it’s probably a scam. The most legitimate, high-quality scholarship matching services, for example, are usually free and available on the Web. Reputable student lenders never require a fee to look at your application.

If you suspect something might be a scam, report it! If you’re still in school, bring any suspect scholarship or loan paperwork to the attention of a teacher or guidance counselor. If you’re an adult, you can lodge a complaint with the National Fraud Information Center (NFIC) or the Federal Trade Commission (FTC). Don’t count on anyone else to report it for you: even modestly successful scams can turn a profit for years before anyone catches on.

Legitimate Financial Aid
If you know where to look, you can find more than enough legitimate avenues of funding for your higher education. Check out Federal Student Aid (FSA), for reliable resources of college financial aid. An office of the U.S. Department of Education, FSA provided $83 billion in new aid to 10 million postsecondary students between 2007 and 2008. Among their most important services, FSA can provide you with a Free Application for Federal Student Aid (FASFA), the fundamental qualifying form used for federal and government-assisted commercial lender programs (the FSA processes 10 million FASFAs every year).

In additional to federal loans, you may also qualify for federal grants. Grants are typically reserved for undergraduate students, and are based upon need. While the government has deep pockets, you may also be interested in private loans. Just remember, when applying for a loan, be sure you’re banking with a legitimate lender with some recognition.

Ultimately, the best defenses against college loan and scholarship scams are good information, common sense, and clear thinking. Remember the basic rule of thumb: if something sounds too good to be true, it probably is.

Federal Student Aid
FinAid, “Common Scholarship Scams”
FinAid, “Protecting Yourself From Scholarship Scams”
FinAid, “Reporting Scholarship Scams”
FinAid, “Scholarship Scams”

Publish date: December 23, 2008