Federal Agencies Release Second Annual Report to Congress on College Scholarship Fraud

Every year millions of students apply for financial aid and scholarships to help finance their college education. Sometimes they fall prey to scholarship and financial aid scams. To help federal agencies combat financial aid scams, Congress passed the College Scholarship Fraud Prevention Act of 2000. In their second report to Congress on scholarship fraud, as required by the Act, the Federal Trade Commission and the Departments of Justice and Education describe their continuing efforts to combat scholarship and financial aid fraud. The report explains "Project Scholarscam"- the FTC's continuous campaign to prevent and prosecute scholarship fraud, and highlights the FTC's and Department of Education's (ED) continuing efforts to find new ways to partner their outreach efforts.

The College Scholarship Fraud Prevention Act of 2000 established stricter sentencing guidelines for criminal financial aid fraud and charged ED and the FTC with implementing national awareness activities, including a scholarship fraud awareness site on the ED Web site. The Act also requires the Attorney General, the Secretary of Education, and the FTC to submit a consolidated report to Congress each year assessing the nature and quantity of scholarship fraud incidents since the date of enactment. The FTC, DOJ, and ED have implemented all the provisions of the Act, and their accomplishments are highlighted below.

As noted in last year's report, the U.S. Sentencing Commission amended its guidelines, effective November 1, 2001, to increase the offense level for financial aid misrepresentations. A reporting procedure between the Sentencing Commission and DOJ has been established to track this information for future reports. It is too soon, however, for the Sentencing Commission to report any judicial imposition of the enhanced sentences at this time.

The ED and the FTC have continued and refined their consumer education products. Using a variety of media, such as Web sites, booklets, brochures, videoconferences, flyers, posters, and bookmarks, ED and the FTC disseminate information to help consumers avoid falling prey to scholarship scams. The ED materials also provide information about the major federal student aid programs. They remind students that there is no fee to submit the Free Application for Federal Student Aid and that free assistance with applying for financial aid is available from ED, high school counselors, and college financial aid administrators. ED's materials are available at www.ed.gov/studentaid or by calling 1-800-4-FED-AID (1-800-433-3243; TTY: 1-200-730-8913). The FTC's materials are available at www.ftc.gov/bcp/edu/microsites/scholarship/index. Scholarship information is also available on the FTC's Spanish language Web site, www.ftc.gov/bcp/conline/spanish.

The report states that since the enactment of the Act, the number of complaints made by consumers regarding scholarship scams to the FTC's Consumer Sentinel database increased in 2002. This increase was after a small downturn in 2000 and 2001. The FTC is not certain whether the increase is due solely to more fraudulent activity or better reporting. It is also possible that the overall level of fraud is increasing because of recent unfavorable economic conditions that may lead consumers to seek assistance from unscrupulous companies. Moreover, it is possible that factors not related to an increase in scholarship fraud, such as an increase in the number of law enforcement agencies contributing to the Consumer Sentinel database and an increased consumer awareness of the fraud and how to report it, might account for the increase.

An evaluation of the Consumer Sentinel complaints indicates that the nature of the fraud appears to have changed over time. In the 1990s, most of the complaints concerned telemarketing fraud by bogus scholarship search companies. Recent complaints concern financial aid consulting firms that use direct mail solicitation and oral sales presentations to market their services. This shift may be due in part to the fact that the FTC's Project Scholarscam was successful in stopping fraudulent scholarship search telemarketing operations.

In terms of law enforcement, the FTC has continued its campaign to prevent and prosecute scholarship fraud. Project Scholarscam, formally initiated in 1996, combines law enforcement with consumer education to stop and prevent fraudulent purveyors of college financial aid services. The FTC's law enforcement actions have resulted in the entry of federal court orders prohibiting future misrepresentations against 11 companies and 30 individuals. Most of the orders permanently banned the defendants from marketing scholarship services, and many require the defendants to post performance bonds before engaging in telemarketing. As a result of the FTC's law enforcement actions, more than $560,000 has been refunded to consumers or disgorged to the U.S. Treasury. In one case, an FTC civil action led to criminal prosecution by DOJ.

The FTC also has been active in monitoring the Internet for financial aid fraud. In January 2003, the FTC conducted a "surf" of Web sites advertising college scholarship services. The surf provided a snapshot of the advertising of scholarship services on the Internet and provides the FTC with the opportunity to identify sites that might not be in compliance with the FTC Act. The FTC identified 12 of the 53 sites it reviewed as having suspect claims. The FTC sent these 12 sites warning letters, and alerted the operators that any online misrepresentations could result in legal actions.

In conclusion, the report notes that the agencies will continue to work cooperatively to prevent and prosecute scholarship fraud. The FTC will continue to monitor the Consumer Sentinel database for new targets and will solicit information from ED regarding its activity as well. The FTC and DOJ will continue to coordinate parallel civil/criminal actions in appropriate cases.

Copies of the report, as well as the consumer education materials and other documents related to Project Scholarscam, are available from the FTC's Web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint, or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1 877-382-4357), or use the complaint form at http://www.ftc.gov. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

(Matter No. P994249)