Five College Money Scams

SmartMoney

When it comes to college funding, rip-offs abound.

Financial aid scams come in two forms. First, you've got federal and private loans scams. Most often these cons are mailed directly to students' and parents' homes, demanding money upfront (usually in the form of "processing fees") before paying out funds.

Other rip-offs relate to scholarships. Like loan scams, scholarship cons charge students upfront for help securing free money. These solicitations may come in the mail or to your email account. Kids searching for scholarships online may also stumble onto bogus web sites.

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How prevalent are these scams? Mark Kantrowitz, publisher of Finaid.org, a financial aid web site, says that 5% to 10% of his site's users report receiving illegitimate come-ons. He estimates 100,000 families are swindled out of $100 million annually. The Federal Trade Commission, which investigates financial aid cons, states that typical scholarship or loan scams typically cheat individuals out of $50 to $1,000.

And this year, these swindles could be on the rise, Kantrowitz says, as con artists take advantage of fewer lenders being in the market thanks to the credit crunch. Over the past year, at least 150 lenders have exited the student-loan industry, so the private loans that still exist tend to be harder to come by and more expensive.

So how do you recognize a scam? Certainly, the old adage that any offer that sounds too good to be true probably is applies here. Also, watch out for letters with typos or companies that don't provide a phone number or other contact information, says Justin Draeger, a spokesman for the National Association of Student Financial Aid Administrators (NASFAA).

Here are specific scams to be on the lookout for:

Loan Scams

Advance Fee Scams: Con artists send families letters offering private or federal loans. To get the cash, the recipient must pay an application, processing or service fee. The catch is that legitimate lenders never ask for money upfront, since any origination fees are taken directly out of the disbursed funds, says NASFAA's Draeger.

Department of Education Scam: Swindlers send offers of loans on letterhead that looks similar to the Department of Education or another government agency. The Department of Education, however, doesn't solicit consumers to borrow money, so any mail received is illegitimate.

Scholarship Scams

The "Nigeria" Scam: Tricksters send a check for more than the advertised amount and then ask the students or parents to send back the difference between what was received and the original amount promised.

Guaranteed Money: Fraudsters claim that millions of dollars in scholarships go unused each year and then, for a fee, guarantee to secure a student a piece of that money. They may even offer to fill out the applications for the student.

Scholarship Search Scam: Anytime a student is charged a fee to search a scholarship database.

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How to Legitimately Fund College

As families try to secure money for college, they should always go after scholarships, or the free money, first. The good news is that there's no reason students should ever pay to research these private grants. There are plenty of free databases available online, including Sallie Mae's, which lists 2.9 million scholarships worth $16 billion. Finaid.org (through its Fastweb.com web site) and education publisher Peterson's also host robust free scholarship databases that students can search.

Next, students and parents should apply for federal loans since they tend to have lower interest rates than private loans. If families are still scrambling to finance this fall's tuition, lender Sallie Mae says it isn't too late to apply for federal money. In July the government even made it a little easier for students to pay for school by increasing the loan amounts that can be borrowed by an additional $2,000 a year.

And if funds are needed after federal loans are exhausted, there are still plenty of lenders, including Citibank, and even Sallie Mae, that are originating private loans.

Unfortunately, there may still be some families who struggle to come up with all the necessary money for college. Many schools now offer alternative payment plans for a small fee, usually $45, that allow parents to pay for tuition over a nine- or 10-month period, says Martha Holler, a spokeswoman with Sallie Mae.

If parents do receive a loan solicitation that sounds too good to pass up, call the university's financial aid office to make sure it's legitimate says, NASFAA's Draeger.

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