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Don't Get Swindled by Scholarship Scams

Here at The Motley Fool, we're celebrating back-to-school days with financial advice for parents, kids, and students of all ages. Check out the entire curriculum right here.

From penny-stock hypesters to low-cost mortgage pushers to Ponzi scheme peddlers to "free vacation" hucksters -- selling empty promises is certainly not a new racket. In fact, preying on consumer fear and confusion (pledging to ease the pain for a price) is practically a bona fide career path.

Just when you thought you could fend off the scam artists, they found a new target -- your kids. Rising education costs and the complexities around student loans and scholarships have turned the college funding field into a Petri dish for potential scams.

The recent inside-job racket, in which university administrators were caught accepting kickbacks to tout the providers on the schools' preferred lender lists, led to settlements among education companies DeVry (NYSE: DV  ) and Capella Education (Nasdaq: CPLA  ) , as well as lenders Citigroup (NYSE: C  ) and Sallie Mae (NYSE: SLM  ) . But it also underscores an important point: The only person who truly has your offspring's best interest at heart is you, Mom and Dad.

So here's how to protect you and your progeny from falling for a student-aid or scholarship scam.

Free money? Heck, yeah!
"We'll do all the legwork for you," they promise. "We have the inside track on scholarships that you'll never find on your own," they coo. "Junior will be rolling in offers in no time," they pledge. "Oh, and we accept MasterCard, Visa, Discover and American Express ..."

It all sounds good, except when Mom and Dad hand over a check for $1,000 and never see their money again.

So how do you know if someone's pulling you and your child's leg? Read on.

Signs that spell S-C-A-M
A legitimate scholarship does not require applicants to pay upfront fees. To give you access to a low-interest loan, legitimate operations do not charge a processing fee (often couched as an "origination," "guarantee" or "handling" fee).

Other red flags that the student aid provider is up to no good:

  • Claiming only they have access to "secret" scholarships: There is no secret vault with scholarship money. All of this information is accessible by Joe Q. Public if he knows where to look, but that doesn't stop companies from claiming that only they can hunt down this stash of school dough. To lure you in, they'll ask for a membership fee to ensure that "only serious candidates apply."
  • Asking for reserve or hold money: Run to the nearest exist if an outfit asks for a credit card number or bank account information to reserve or hold the scholarship for Junior.
  • Telling you it's "guaranteed, or your money back": If only. There are no "guarantees" when it comes to getting scholarships. But since consumers find comfort in a sure thing, unscrupulous companies will tell clients what they want to hear.
  • Sending you any unsolicited offers: Ignore email (or other) solicitations from companies from which you didn't request information.

DIY scholarship search tips

In the world of financial commitments, college is undeniably a big-ticket item. A lot of money is on the line, and, adding to the pressure, your child's future prospects are at stake. It pays to put in the time to do it right -- and doing at least part of it on your own takes the intimidation out of the equation. Follow these tips to pass College Aid 101 with flying colors:

  • Start the scholarship/grant search early. Ideally, start when your child is a sophomore or junior in high school.
  • Apply for financial aid. Even if you're part of a six-figure-income family, your child may qualify for financial aid. So do apply.
  • Have your child do a practice run. The essay-writing portion is an open-book test. Have your college hopeful compose some practice essays to perfect that subtle yet impressive brag-worthy list of accomplishments and extracurricular activities.
  • Fish first for local programs. Play the odds and start your search for scholarships in your own backyard. (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. Then expand your search regionally, and only then nationally.
  • Get your kid on Google. Those so-called "secret scholarships" are out there. It's just a matter of getting your search engine to serve 'em up. Type in the names of companies or organizations or hobbies in addition to the word "scholarship," and see what you get.

Even if you do hire scholarship-search help, get to know the lay of the student-aid land. Caveats aside, there are legitimate college counselors who ably usher families through the aid process by walking you through the application and essay portion. These counselors do charge an upfront fee but do not hit you up for ongoing payments. Look also for free seminars from your child's high school. And check references (do a solid Internet search on the company) before you outsource any part of this task.

Finally, kick the tires before you commit. (In Fooldom, when it comes to your money, this piece of advice stands no matter what the service.) Check references. Ask questions. Take a breather, and make sure you're completely confident in the source of information/help before you sign on the dotted line. The best transactions are completely transparent -- you know who gets paid for what, and the terms of the deal are crystal clear.

College might be a distant memory for Dayana Yochim, but so, too (thankfully), is the financial burden of paying for it. Over at theMotley Fool Green Light service, you can get a handle on all things college (and every other money decision for that matter). The Fool's disclosure policy was a straight-A student.

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