Beware of Scholarship Scams and Financial Aid Fraud

Scholarship scams and financial aid fraudsters take advantage of your desperation for money to pay for college and to repay student loans. Beware if an organization promises financial assistance or financial relief, but charges a fee. If you have to pay money to get money, it’s probably a scam.

Never invest more than a postage stamp to get free information or to apply for financial aid.

Scholarship Scams

Most scholarship scams promise to provide you with a college scholarship, but try to get you to pay them money. The scholarship usually never materializes.

There are many variations on the fees charged by scholarship scams. They can be called application fees, administrative fees, and processing fees.

Some scholarship scams ask you to pay the taxes on the scholarship. But, taxes on a scholarship, if any, are not paid up front and are never paid to the scholarship provider. Scholarships for tuition and textbooks are tax-free, if the student is pursing a degree or certificate. Scholarships for room and board, transportation and other living expenses are taxable, but the taxable portion of a scholarship is reported by you on your federal income tax return.

Other warning signs of a scholarship scam include:

• You won a scholarship, but never applied. Often, a congratulatory letter comes with a request for you to pay money to release the scholarship or pay the taxes.

• False claims of tax-exempt status. You can confirm that an organization is tax exempt using the Exempt Organizations Select Check tool from the IRS.

• Unusual requests for personal information to confirm your identity. Legitimate scholarship providers do not ask for a credit card or bank account number. They do not need your Social Security Number because they are not required to report the scholarship to the IRS.

• Claims of government affiliation. It is not uncommon for a scholarship scam to state or suggest that they are affiliated with a government agency. This can include logos involving eagles, the American flag or the tree of knowledge, names that are confusably similar to legitimate organizations, and false claims of government approval.

• Bogus scholarship check overpayment. The scholarship provider sends you a check for more than the amount of the scholarship and asks you to refund the difference. The scholarship is not legitimate and the scholarship check is a forgery that will bounce.

• Tip offs in the letter. Letters from scholarship scams often include typos and spelling errors. They may also fail to include a telephone number or email address. The mailing address may be a mail drop, as opposed to a real street address.

Since 1996, the Federal Trade Commission (FTC) had pursued scholarship scams and other forms of financial aid fraud as part of Project ScholarScam. The College Scholarship Fraud Prevention Act (P.L. 106-420) stiffens the penalties for perpetrators of scholarship scams to encourage law enforcement to pursue scholarship fraud cases.

You can find scholarships on Bold.org for free. Bold.org matches students to scholarships, which can be created by anyone. Sign up now.

Guaranteed Scholarship Matching Services

Guaranteed scholarship matching services charge a fee to match you against a database of scholarships and guarantee success. But, nobody can guarantee that you’ll win a scholarship. Offering such a guarantee is on its face fraudulent.

There is no need to pay money to search for scholarships, as there are more than a dozen free scholarship search sites.

Also be wary if they claim to have exclusive information, high success rates or say that they apply on your behalf. Use of the unclaimed aid myth is another warning sign.

Did you know that scholarships are taxable? Use our Scholarship Tax Calculator to figure out the taxable amount of your scholarships and calculate how much you’ll have to pay in taxes. Amounts used to pay for tuition and textbooks may be tax-free, but amounts used to pay for living expenses are taxable. 

Advance-Fee Student Loan Scams

Advance-fee loan scams charge an up-front fee to apply for a student loan, to reduce your loan payments or interest rate, to apply for loan forgiveness or to obtain other forms of financial relief.

Student loans never charge fees in advance. The loan fees, which may include guarantee fees, origination fees, default fees and insurance are deducted from the disbursement. They are not paid separately.

There are no paperwork processing fees or application fees for legitimate student loans.

Federal and state consumer protection laws prohibit credit-repair services from charging fees before the services are performed. Organizations that claim to reduce monthly loan payments or to provide loan forgiveness are considered to be credit-repair services.

Free Financial Aid Seminars

Sometimes, a free financial aid seminar is little more than a high-pressure sales pitch for a product or service related to financial aid, such as financial aid consulting services, FAFSA preparation services, investment products and scholarship search services.

Don’t let time pressure, such as a limited-time discount, force you into paying for a product or service you don’t really need.

As the name suggests, the Free Application for Federal Student Aid (FAFSA) is a free form. You do not need to pay anybody to file the FAFSA. There are several sources of free help for completing the FAFSA.

Use our Financial Aid Calculator to estimate your expected family contribution (EFC) and financial need based on student and parent income and assets, family size, number of children in college, age of the older parent and the student’s dependency status.

How to Protect Yourself from Fraud

Never pay money to apply for a scholarship or financial aid of any kind. The goal of most con artists is to get money. But, legitimate scholarships give recipients money. They do not collect money from students and their families.

Trust your first impression of the offer. If it sounds too good to be true, it probably is. Scams count on having your emotions overwhelm reason. They try to trigger excitement, worry, greed and fear.

Wait at least a few days before responding to any financial aid offer. This will give you time to make a calmer, smarter decision after your emotions subside. Never respond to an unsolicited offer.

Show the financial aid office to a school counselor or college financial aid administrator for their opinion.

Do not share your bank account numbers, credit card numbers or Social Security Number with anybody. A scam can empty your bank account using a “demand draft” with just your account number and bank routing number. They do not need your signature.

How to Report Financial Aid Fraud

If you encounter a scholarship scam or other forms of financial aid fraud, report it to Fraud.org. You can also call 1-800-654-7060. Fraud.org, previously known as the National Fraud Information Center, is run by the National Consumers League. Fraud.org shares information with the Federal Trade Commission (FTC).

You can report scams directly to the FTC using their complaint form or by calling 1-877-FTC-HELP (1-877-382-4357).

If the scam involves postal mail, report it to the U.S. Postal Inspection Service (USPIS). Call 1-877-876-2455 and say “fraud” to get directed to the right call center. You can also report it to the Postal Crime Hotline at 1-800-654-8896.

Report scams to your state attorney general (AG). Every AG has a department of consumer protection that prosecutes scams.

Financial aid fraud involving federal student aid should be reported to the Office of the Inspector General at the U.S. Department of Education. You can call 1-800-MIS-USED (1-800-647-8733) or use the online complaint form.

Also, file a complaint with the Better Business Bureau (BBB).

Next Steps: Check out our Complete Guide to Financial Aid and the FAFSA. Check our of Complete Guide to Scholarships.

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