Mr. Chairman, I thank you for convening this hearing on S. 1455, the College Scholarship Fraud Prevention Act of 1999, and for inviting me to testify before the Senate Judiciary Committee this afternoon. My name is Mark Kantrowitz, and I am the publisher of the FinAid and eduPASS web sites, resources that exist to aid students in navigating the sea of financial aid and combat the type of fraud the Abraham-Feingold legislation addresses. I am pleased to have the opportunity to share my experiences with the Committee today.

Every year, several hundred thousand students and parents are defrauded by scholarship scams. The victims of these scams lose more than 100 million dollars annually.

Most families are afraid of the high cost of a college education and find the student financial aid process to be overwhelming. Financial aid even has its own language, an alphabet soup of acronyms like EFC and FAFSA and terms like need analysis and professional judgment. In such an environment, scams can thrive. When families are approached by outfits that promise to get the student all the money he or she needs to pay for college, they are so desperate that they lose their sense of caution. After all, many scholarship scams guarantee success and tell consumers that their services are completely without risk.

The most common types of scholarship scams include the following:

- Scholarships for Profit. These are scholarships with an application fee or other fees, but no money is ever awarded, the amounts disbursed are less than advertised, or the scholarship sponsor receives more money in fees than is returned to the students in the form of scholarships.

- Guaranteed Scholarship Search Services. These are information brokers who charge a fee to match student information against a database of scholarships and guarantee that the student will receive at least $1,000 or $2,000 in scholarships.

Other types of scholarship scams include:

- Guaranteed Financial Aid Consultants. These outfits promise to maximize eligibility for need-based student aid by decreasing the Expected Family Contribution (EFC) and guarantee success, suggesting that they can send the student to college for free. Although there are legitimate strategies for decreasing the EFC, such as paying off consumer debt (e.g., credit cards and auto loans) and shifting assets from the student's name to the parent's name, the typical decrease in the EFC is only $1,000 and is often realized in the form of loans. Some outfits may advocate that the families provide false information on the FAFSA and may fail to sign in the paid preparer section of the form.

- Student Loans with an Up-Front Fee. These scams charge an "application", "processing", "origination", or "guarantee" fee up-front, but the promised loans never materialize. Federal education loans do not have application fees and always deduct the origination and guarantee fees from the disbursement check.

- Seminar Scams. These outfits advertise a free financial aid seminar, often in letters mailed directly to parents. The seminar turns out to be a high pressure sales pitch for expensive financial aid products and services. What little financial aid information is presented is often inaccurate or obsolete. They do not provide the families with practical advice.

-Linked Product Scams. These scams state or suggest that the family must purchase a particular product, typically student life insurance or an annuity, in order to get access to federal student aid.

Scholarship scams succeed by giving families an unreasonable expectation of success in using their services to obtain financial aid. Several of the most common misrepresentations include:

The unclaimed aid myth. This myth states that "$6.6 billion in aid went unclaimed" and promises to get the student their fair share. Other common variations include $2.7 billion and $135 million. This is an extremely pernicious myth, because it not only defrauds consumers, but suggests to private sector benefactors that there is no need for them to create new scholarships. The $6.6 billion version of the myth is based on a 1976-77 academic year study in which the National Institute of Work and Learning estimated that $7 billion was potentially available from employers in the form of employee tuition assistance, but that only an estimated $400 million was used. Nobody has ever substantiated that any scholarship money available to the general public has ever gone "unclaimed". If there were such an unclaimed award, it would only need to be listed in one of the free national scholarship databases to obtain thousands of qualified applicants.

- High success rates. A guaranteed scholarship matching service might advertise a 96% success rate. The National Post-secondary Student Aid Study (NPSAS) conducted by the National Center for Education Statistics at the US Department of Education found that only one in twenty-five students (4%) receives a private sector scholarship, and the average amount is only about $1,600.

- Bogus Guarantees. A scholarship matching service might offer a guarantee that the student will receive a minimum amount of aid, typically $1,000 or $2,000. Such guarantees often come with restrictions that render them meaningless, such as requiring the student to submit rejection letters (most sponsors only notify winners), or include federal aid as part of the total.

- False claims of government, Chamber of Commerce, or BBB approval. One scam even created their own bogus BBB. Another stated that they are listed in the US Library of Congress. Others misrepresent the nature of their business by using an eagle in a formal seal as their logo, and words like "National", "Administration", "Foundation" and "Federal" in their names.

- False claims of special influence with or special access to scholarship sponsors.

The Federal Trade Commission initiated law enforcement activity against scholarship scams in the Fall of 1996. To date the FTC has brought actions against eight companies that collectively have defrauded 175,000 consumers out of an estimated 22 million dollars. The FTC initiative spurred the Attorneys General in several states to take action against scholarship scams operating in their states. The FTC also launched a consumer education campaign with their "Six Signs Your ScholarShip is Sunk" brochure.

But this is just the tip of the iceberg. I estimate that there are 900 to 1,000 scholarship scams of all types still in operation, with new scams being created every year. The typical scam charges fees ranging from $2 to $800, and has 5,000 to 10,000 victims. Some scams have charged fees as high as $5,000, and some have had as many as 100,000 victims.

I support the College Scholarship Fraud Prevention Act because it addresses the problem through a combination of law enforcement and consumer education.

With regard to S1455, I would like to suggest a few ways in which the legislation could be enhanced:

- In section 5, require that only organizations which provide information and services for free be listed. In the Higher Education Amendments of 1998, Section 485(d) of the Higher Education Act of 1965 was amended to direct the US Department of Education's web site to include direct links to databases that contain information on public and private financial assistance programs, and further stated "The Secretary shall only provide links to databases that can be accessed without charge and shall make reasonable efforts to verify that the databases included in a direct link are not providing fraudulent information." There are numerous high quality sources of free information about financial aid, including the FinAid, FastWeb, College Board, and Peterson's web sites.

- In section 5, require the organizations to publish a privacy policy on their web site and require the organizations to provide the consumer with the ability to opt out of any mailing lists as part of the registration process.

- In section 5, allow the US Department of Education to exclude businesses which are under investigation or being prosecuted by State Attorneys General.

- In section 5, give the US Department of Education broader discretionary power in determining which organizations should not be listed, since a listing on the www.ed.gov site will be viewed by consumers as an implicit endorsement. One possibility would be to have the Department assemble an advisory committee of respected college financial aid personnel and other financial aid experts to set standards for inclusion on the Department's web site.

- In section 5, add language directing the US Department of Education's consumer hotline, the Federal Student Aid Information Center (1-800-4-FED-AID), to provide similar information to consumers who call with questions about a financial aid business's legitimacy.

- Expand the language of the legislation to include organizations that provide information about student financial aid in addition to organizations that offer financial assistance.

One additional suggestion concerns what I call "scholarships for profit" or organizations that offer scholarships with an application fee. (Note that I'm not talking about organizations that provide information about scholarships, such as scholarship databases and books, but rather organizations that claim to give money to students but charge an application fee or other fees.) Students apply for these awards, thinking that the organization is involved in philanthropy, when in reality the organization is a for-profit business making a substantial amount of money off of application fees. If the application fee revenue exceeds the amount disbursed in scholarships, the outfit is making a profit by offering the scholarships. Even if the application fee revenue is less, the organization is effectively recirculating student money in the form of scholarships, or getting the students to cover administrative expenses such as salaries. In many cases the students would be better off playing the lottery, where at least there's a 50% payout.

To give a concrete example, suppose a scholarship program gives away fifty $1,000 scholarships a year, but charges a $10 application fee and gets 10,000 applications. They receive a total of $100,000 in application fees, and give out $50,000 in scholarships, for a net profit of $50,000. Or let's suppose the application fee is only $5, in which case the $50,000 in application fees is given out entirely in scholarships. Even in that case it should feel a little odd to you. In both cases, fifty of the 10,000 students are well served by the scholarships, in that they paid $5 or $10 and got $1,000. But the remaining 9,950 students have no benefit for their application fee.

In some cases the application fees are charged by organizations that appear to be merely misguided. For example, in one case a tax exempt foundation charged students a $3 application fee, received more than 100,000 applications, but only gave away 180 $1,000 scholarships. The foundation was able to cover its expenses and also build up a rather large nest egg. In this case I was able to convince them to eliminate the application fee. But in most cases it is an organization or an individual who is deviously defrauding students by making them think that the purpose of the organization is to give them money, when it really is to enrich the people operating the scam.

The bottom line is that philanthropy should be about giving money, not getting money. The key to these scams is they are able to charge an application fee or other fees to apply for their scholarship programs, while still being able to call it a scholarship or fellowship. If S1455 were to make it illegal to misrepresent what probably amounts to little more than a raffle or lottery as a scholarship, making it illegal for an organization that offers a scholarship to charge an application fee or other fee (e.g., "administrative fee", "redemption fee", or whatever they want to call it) to apply. If they use the word "scholarship" or "fellowship", they should not be able to charge the student (or the parent/teacher) money as a requirement for the student to submit an application.

It is important that the language of such a provision carefully distinguish such scams from legitimate operations, such as:

- Publishers of scholarship books (e.g., Peterson's, Prentice Hall, McGraw Hill), who charge a fee for a book of information about scholarships. The distinction here is that such publishers are charging for information about a variety of scholarships, not a fee to apply for a scholarship.

- Scholarship management services (e.g., USA Group, Citizen's Scholarship Foundation of America, etc.) who charge the scholarship sponsor a fee to manage their scholarship programs. The distinction here is that the sponsor is getting charged an administrative fee, not the individual students.

Mr. Chairman, I once again thank you and the Committee for taking an interest in the issue of financial assistance fraud, and for inviting me to share my thoughts on the matter. I would be happy to answer any questions you may have.