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7 Signs of a Student Aid Scam

Every year, consumers lose more than $100 million to student financial aid scams, according to Finaid.org. It's not a stretch to see why. Finding money for college is rife with complexity and confusion:

  • Large fiscal outlay required? Check.
  • Complex financial aid process? Check.
  • Deadline pressures? Check.
  • A loved one's future at stake? Check.

With deadlines for applying for aid approaching, 'tis the season for student aid scams.

The price of convenience
Applying for federal, state or college aid, loans, grants and/or scholarships is time-consuming, involved, confusing and pretty much the exact opposite of fun. Shady types love to take advantage of this.

The most common pitch involves a company that offers to apply for federal student aid on your behalf -- for a fee, of course. It's equivalent to paying someone to incorrectly register your car at the DMV. Customers often end up fixing the errors on their own -- digging through paperwork, double-checking every dotted "i" and all those uncrossed "t"s, and filling in the blanks.

Such "services" aren't just shoddy (or in some cases, even illegal). They're also charging anywhere from $100 to $1,000 for something that you can do on your own for free. At best, you get back a few forms filled out (often incorrectly) on your behalf. At worst, the money and the help disappear into thin air.

FAFSA: The first "F" stands for ...
Applying for federal aid requires filling out a FAFSA form (which you can do at FAFSA.gov). FAFSA stands for Free Application for Federal Student Aid.

Note the first word: "free." Remembering that four-letter word will help you get through the entire college funding process without falling for a scam.

The FAFSA.gov website (which redirects you to the less-easy-to-remember but legitimate www.fafsa.ed.gov/index.htm) is your student aid helper. There, you can find out what loans you will qualify for; estimate costs of your college and the EFC (Expected Family Contribution); search for scholarships; and check aid application deadlines – state, federal and college (although you may have to contact the financial aid office for deadlines at certain colleges). FAFSA.gov also offers tools for analyzing your financial aid awards.

However, FAFSA won't whisper sweet nothings in your ear regarding shortcuts and secret scholarships. That's the specialty of college aid fraudsters.

Seven signs of college funding fraud
"We'll get you government aid, guaranteed," they say. "Get access to secret scholarships that you'll never find on your own," they promise. "Junior will be rolling in financial aid offers in no time," they pledge. "Oh, and we accept all major credit cards ..."

Before you seek help -- or so-called "help" seeks you out -- here are other things to help you distinguish above-board student aid services from unscrupulous ones:

  • The words "Foundation," "Federal," National," or "Administration" in a company's title or promotional material don't mean that it's on the level or endorsed by any lawful entity.
  • Legitimate scholarships do not require applicants to pay up-front fees.
  • Beware of anyone who asks for up-front "processing/handling," "origination," or "advance-fee" fees for a low-interest loan.
  • There is no secret vault with scholarship money, only accessible to the organization telling you about it. And you definitely don't have to pay a membership fee to ensure that "only serious candidates apply" for access to these supposedly impossible-to-find scholarships.
  • Your child is indeed special. But that solicitation from some outfit saying that your child has been preapproved or specially selected for a scholarship-matching service is only telling you that because they know it's what you want to hear.
  • It is against the law for a company to imply that you need to purchase a financial product (such as insurance or an annuity) to receive federal student aid.
  • There are no "guarantees" when it comes to getting scholarships -- money-back or otherwise.

The right way to get student aid
Given the un-fun-ness of filling out forms like FAFSA and combing the web for scholarship money, it's understandable if you want to reach out for help. Here are some guidelines to help you ace the process:

  • Get familiar with college financing and financial aid options. FinAid.org offers a friendly overview of all the ways you can pay for college. The site has a robust collection of calculators and links to FinAid-vetted sites for more information on military student aid and fee-free scholarship search engines, as well as an "Ask the Aid Advisor" email service staffed by financial aid professionals.
  • Start the search for aid (scholarships, grants, etc.) early, ideally when your child is a sophomore or junior in high school. Start your search with local programs. (Your school's guidance counselor can offer contacts.) Your child has a better shot of standing out with local benefactors than with big national ones.
  • Point your browser to FAFSA.gov and register. This is the official government website, and the one that will walk you through the entire process of applying for federal aid. Remember the ".gov" on the url. It's important.
  • File your taxes ASAP. Your most recent tax return must be on file in order to apply for federal aid in the first place. Given that federal money is doled out on a first-come, first-served basis, you want to hop on this task right away.
  • Fill out the FAFSA, even if you think you won't qualify for aid. The rules for needs-based financial aid change all time. Plus, if you have other children in college (or even private school), the FAFSA formula takes that into account. Also, FAFSA is a prerequisite for applying for federal Stafford and PLUS loans, state grants and college financial aid.

There are legitimate college aid counselors who ably usher families through the aid process by walking you through the application and essay portion. (Some are free through high schools; some charge an upfront fee (though they do not hit you up for ongoing payments).)

If you do decide to outsource any part of the scholarship search task, check references (do a solid Internet search on the company) and kick the tires before you commit.

More money advice for students and parents:

College might be a distant memory for Dayana Yochim, but so, too (thankfully), is the financial burden of paying for it. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 02, 2011, at 12:10 PM, mkyorai wrote:

    In the "Start the Search for Aid" paragraph, I think you meant "while your child is a sophomore in high school", not college. If they've made it to Sophomore year, they've already figured out at least part of the drill...

  • Report this Comment On February 02, 2011, at 12:19 PM, TMFSchool wrote:

    mkyorai -- Good catch! Thank you. I've alerted The People Who Can Fix My Blunders and they're on it.

  • Report this Comment On February 02, 2011, at 1:30 PM, mattsmithsd wrote:

    I'm in the process of transfering to a 4-year and the FAFSA is such a pain in the butt, however, it's necessary like your article says. Unfortunately for me, there are new tax guidelines that won't be released until later this year so my parents are unable to file early. There's always something changing that makes it even more challenging.

  • Report this Comment On February 02, 2011, at 5:18 PM, xetn wrote:

    We could end this fraud by simply ending government funding for education.

  • Report this Comment On February 02, 2011, at 7:48 PM, rwsmd wrote:

    The biggest scam is when students are encouraged to borrow excessively to fund a degree that is worthless.

  • Report this Comment On February 02, 2011, at 8:31 PM, gdf55 wrote:

    @mattsmithsd: the problem with your parents not having their returns done early is well understood and the FAFSA process has a way to get around it by their providing enough income information to make a reasonable estimate. "Haven't done our return yet" would be the worst possible excuse not to apply.

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