[Senate Hearing 106-916]
[From the U.S. Government Publishing Office]
S. Hrg. 106-916
SOLVING THE PROBLEM OF SCHOLARSHIP SCAMS: THE COLLEGE SCHOLARSHIP FRAUD
PREVENTION ACT OF 1999
=======================================================================
HEARING
before the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
on
S. 1455
A BILL TO ENHANCE PROTECTIONS AGAINST FRAUD IN THE OFFERING OF
FINANCIAL ASSISTANCE FOR COLLEGE EDUCATION
__________
OCTOBER 6, 1999
__________
Serial No. J-106-52
__________
Printed for the use of the Committee on the Judiciary
U.S. GOVERNMENT PRINTING OFFICE
70-309 CC WASHINGTON : 2001
COMMITTEE ON THE JUDICIARY
ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio DIANNE FEINSTEIN, California
JOHN ASHCROFT, Missouri RUSSELL D. FEINGOLD, Wisconsin
SPENCER ABRAHAM, Michigan ROBERT G. TORRICELLI, New Jersey
JEFF SESSIONS, Alabama CHARLES E. SCHUMER, New York
BOB SMITH, New Hampshire
Manus Cooney, Chief Counsel and Staff Director
Bruce A. Cohen, Minority Chief Counsel
(ii)
C O N T E N T S
----------
STATEMENTS OF COMMITTEE MEMBERS
Page
Abraham, Hon. Spencer, U.S. Senator from the State of Michigan... 1
Feingold, Hon. Russell D., U.S. Senator from the State of
Wisconsin...................................................... 28
Hatch, Hon. Orrin G., U.S. Senator from the State of Utah........ 33
Leahy, Hon. Patrick J., U.S. Senator from the State of Vermont... 33
CHRONOLOGICAL LIST OF WITNESSES
Panel consisting of Sheila F. Anthony, commissioner, Federal
Trade Commission, Washington, DC; Susan O'Flaherty, director of
financial aid and scholarships, Western Michigan University,
Kalamazoo, MI; Mark Kantrowitz, publisher, Finaid Page LLC,
Pittsburgh, PA; and Sanjeev Bery, U.S. Public Interest Research
Group Higher Education Associate, U.S. Public Interest Research
Group Higher Education Project, Washington, DC................. 4
Prepared statement of Sherri Pickett, senior at the University of
Wisconsin-Madison.............................................. 30
Prepared statement of Dale P. Kelberman, Assistant U.S. Attorney. 38
ALPHABETICAL LIST AND MATERIALS SUBMITTED
Anthony Sheila F.:
Testimony.................................................... 4
Prepared statement........................................... 6
Attachments: Summary of FTC Cases, and FTC ``Teaser'' Web
Sites.................................................. 10
Bery, Sanjeev:
Testimony.................................................... 25
Prepared statement........................................... 27
Kantrowitz, Mark:
Testimony.................................................... 20
Prepared statement........................................... 22
Kelberman, Dale P.: Prepared statement........................... 38
O'Flaherty, Susan:
Testimony.................................................... 16
Prepared statement........................................... 18
Pickett, Sherri: Prepared statement.............................. 30
APPENDIX
Proposed Legislation
S. 1455, a bill to enhance protections against fraud in the
offering of financial assistance for college education......... 41
Questions and Answers
Responses of Sheila F. Anthony to Questions From Senators:
Hatch........................................................ 47
Thurmond..................................................... 47
Responses of Susan O'Flaherty to Questions From Senators:
Leahy........................................................ 49
Thurmond..................................................... 50
Hatch........................................................ 50
Responses of Mark Kantrowitz to Questions From Senators
Hatch........................................................ 52
Thurmond..................................................... 53
Leahy........................................................ 54
Various Attachments to the Answers of Mark Kantrowitz.... 56
SOLVING THE PROBLEM OF SCHOLARSHIP SCAMS: THE COLLEGE SCHOLARSHIP FRAUD
PREVENTION ACT OF 1999
----------
WEDNESDAY, OCTOBER 6, 1999
U.S. Senate,
Committee on the Judiciary,
Washington, DC.
The committee met, pursuant to notice, at 2:10 p.m., in
room SD-226, Dirksen Senate Office Building, Hon. Spencer
Abraham presiding.
Also present: Senator Feingold.
OPENING STATEMENT OF HON. SPENCER ABRAHAM, U.S. SENATOR FROM
THE STATE OF MICHIGAN
Senator Abraham. We will begin the hearing, and I want to
welcome everybody to this hearing of the Senate Judiciary
Committee on solving the problem of scholarship scams, S. 1455,
the College Scholarship Fraud Prevention Act of 1999.
Just to give everybody a brief glimpse of the format here,
basically I am going to make a few opening remarks as part of
an opening statement and then if there are other members here
at that point, we will turn to them for their opening
statements. Then we will begin to hear from the panel, assuming
the panel is here. I don't know the panelists, but if you are
here, you actually can come up now, if you would like, and take
seats. And then we would go to questions to the panel at that
point from whichever members would be present at that occasion.
Today, as I said, we are here to discuss the College
Scholarship Fraud Prevention Act of 1999, legislation which
Senator Feingold and I have introduced to try to help fight
fraud in the offering of college financial assistance.
As the panel will soon detail, schemes by which criminals
defraud unsuspecting students of so-called application or
administrative fees are widespread, constantly changing, and
often quite effective. These scams are hampering the process of
matching financial assistance with those in need, and
perversely deliver the most harm upon those whose need is the
greatest. But even worse than the financial loss, the victim's
feeling that they have been had by one of these scams lasts
much longer and is a demoralizing experience that causes those
victims to become disenchanted with the financial assistance
process altogether.
The decision to pursue a college education constitutes one
of the most important investment decisions a person can make.
Although college is often thought of as a training ground for
an individual's future career, in reality it is much more, as
we all know. College is also a place at which a young person
begins his or her journey into adulthood.
The college experience forces young people to develop the
skills and habits they need to become productive leaders in our
economy and in our communities. Earning a college degree is a
challenge in its own right. Clearly, no American deserves the
additional obstacle of being defrauded out of his or her
opportunity to attend a university.
Skyrocketing tuition presses students and their families to
seek creative ways to finance higher education. America's
greatest economic asset has long been the ability to find
creative solutions to problems. In fact, many companies and
organizations are dedicated to legitimately helping students
and their families. Many of these organizations perform an
invaluable service by either directly providing educational
financing themselves or by directing students to other provider
institutions.
Unfortunately, however, a growing number of profiteering
con artists are taking advantage of students' financial
vulnerabilities. Their tactics vary widely, but most center
around misrepresentations and fraud. The schemes are
everywhere, using the U.S. mail, 800 numbers, and the Internet
to facilitate illegal activities. The standard practice is to
lead the student along, promising financial assistance only if
the student sends payment covering application or processing
fees.
For example, the National Scholarship Foundation sent
hundreds of thousands of postcards to potential college
students. Students were then encouraged to call an 800 number
for more information, at which time they were told that the NSF
would guarantee them $1,000 or more in scholarship money. Of
course, there was a catch, and in this case the students had to
pay a $189 fee that would be refunded if they did not receive
the guaranteed scholarship money.
As it turns out, the students received only general
information about the college application process and about the
cost of a college education--information that they already had
or could have received without these scam artists. The
guaranteed money never materialized and the company never
provided refunds.
The Federal Trade Commission has been aware of this growing
problem, and in 1996 it initiated Project ScholarshipScam, a
nationwide crackdown on fraudulent financial assistance
services. But although the FTC is dedicated in stopping these
con artists, it can only file civil charges seeking redress to
defrauded consumers and injunctions prohibiting or restricting
future activity. Regardless of the clarity of proof and the
seriousness of the wrongdoing, the FTC simply lacks the
authority to prosecute scholarship scam artists on criminal
charges.
The Department of Justice is responsible for the criminal
prosecution of these fraudulent activities, but unfortunately
criminal prosecution is quite rare, even in the face of
widespread criminal behavior. In one of the few cases which
occurred right next door, in Maryland, a Federal jury convicted
Christopher Nwaigwe of defrauding more than 50,000 college
students of more than $500,000. He launched his scheme by
mailing letters announcing scholarship offers of $2,500 to
$7,500. The catch was that students had to send him $10,
described as a processing fee. The students received nothing in
return. However, Mr. Nwaigwe was not so fortunate; he received
36 months in prison for his service.
Despite its successful disposition, this case demonstrates
a distressing fact. The current system does not deter
criminals. In 1993, Mr. Nwaigwe was ordered by the U.S. Postal
Service to stop sending misleading letters, an order he
ignored. In 1996, he was the subject of a civil action in U.S.
District Court in Baltimore, in which he was permanently
enjoined from using his materials to solicit money from
students. But it was not until this year that he was finally
facing criminal prosecution.
Senator Feingold and I introduced this bill because we
believe the continued plague of scholarship fraud warrants a
renewed Federal effort. Our legislation has three major
components.
First, this bill will provide an additional 10 years
imprisonment and/or heavier fines in fraud cases involving the
offering of education services. We believe this enhancement
will serve a dual purpose, encouraging the Department of
Justice to pursue and prosecute more of these cases, while
chilling the fraudulent industry as a whole.
Second, the bill will improve the FTC's ability to enforce
orders for disgorgement and redress to consumers by excluding
debts associated with college financial aid fraud convictions
from the list of permissible exemptions from a bankruptcy
estate. In this context, beneficiaries of scholarship scam
operations use their fraudulent gains to buy residential
properties. When caught, they file for bankruptcy, and because
many States exempt residential properties from bankruptcies,
many of these con artists who have been found guilty by a court
are permitted to retain their homes, no matter how great the
value.
After the bankruptcy proceedings clear their debt, these
operators then are free to sell their homes and keep the money
they defrauded out of students. In using a narrow exception
patterned after the response to the savings and loan crisis,
our bill prevents crooks from further abusing the public trust
while maintaining legitimate protections for those honestly in
need of bankruptcy protection.
Finally, our view is that simply deterring the con artists
is not enough. We must also help students and their families
obtain financing help from legitimate companies, making it
easier for students and their families to differentiate the
legitimate companies from the con artists.
Currently, the FTC and the Department of Education
independently warn students about fraudulent scholarship
services. This legislation will enhance those efforts, calling
for a coordinated effort in educating our students. For that
purpose, this bill would require that the Secretary of
Education consult with the FTC and post financial assistance
fraud information on the Department of Education's Internet Web
site. It is our hope that this Department of Education/FTC
collaboration will further expose the con artists and help to
raise public awareness of their tactics.
With that, I am pleased to welcome the members of our first
panel. We appreciate your all being here, and let me begin by
introducing them from, I guess, my left to right. We will first
hear from Ms. Sheila Anthony, whom we welcome today. She is a
Commissioner of the Federal Trade Commission here in
Washington.
We will then hear from Ms. Susan O'Flaherty, who is the
Director of Financial Aid and Scholarships for Western Michigan
University, in Kalamazoo, MI. Incidentally, I am pleased to
note that Western Michigan is also located in the congressional
district of Congressman Fred Upton, who is the lead sponsor of
the companion legislation on this issue in the House of
Representatives.
Next is Mr. Mark Kantrowitz. Mr. Kantrowitz is the
publisher of FinAid as well as eduPASS Web sites. FinAid has
been named the top college financial aid site by numerous
publications, including Yahoo, Internet Life, and Time
Magazine.
Finally, we will hear from Sanjeev Bery, who is a higher
education associate for the U.S. Public Interest Research
Group, or PIRG. U.S. PIRG is the national lobby office for
student-led public interest organizations in 25 States across
the country, including Michigan.
So we will begin. What we do normally here is kind of post
through this clock system about a 5-minute time frame for
opening statements. The orange light will come on at 4 minutes,
the red light at 5. We are usually pretty flexible in terms of
letting people finish the points they are making after the 5
minutes. If you have longer statements, though, we will include
the total statement in the record, but would urge people to--
not that I set a particularly good example here today, but
would urge you to try to stay at least reasonably within the 5-
minute limit.
Commissioner Anthony, we will start with you, and we
welcome and thank you for being here today.
PANEL CONSISTING OF SHEILA F. ANTHONY, COMMISSIONER, FEDERAL
TRADE COMMISSION, WASHINGTON, DC; SUSAN O'FLAHERTY, DIRECTOR OF
FINANCIAL AID AND SCHOLARSHIPS, WESTERN MICHIGAN UNIVERSITY,
KALAMAZOO, MI; MARK KANTROWITZ, PUBLISHER, FINAID PAGE LLC,
PITTSBURGH, PA; AND SANJEEV BERY, U.S. PUBLIC INTEREST RESEARCH
GROUP HIGHER EDUCATION ASSOCIATE, U.S. PUBLIC INTEREST RESEARCH
GROUP HIGHER EDUCATION PROJECT, WASHINGTON, DC
STATEMENT OF SHEILA F. ANTHONY
Ms. Anthony. Thank you, Senator. I am pleased to have this
opportunity to describe the Commission's consumer protection
activities in the area of scholarship scams. The Commission
applauds you, Senator Abraham, and also Senator Feingold for
focusing on this area of serious law enforcement issues raised
by fraudulent purveyors of scholarship services.
In the fall of 1996, the Commission launched Project
ScholarScam, a joint law enforcement and consumer education
effort aimed at the fraudulent purveyors of so-called
scholarship services. At that time, the Commission announced
six law enforcement cases against companies we alleged falsely
promised scholarships to students and their parents nationwide.
In November 1997, the Commission followed through with two
additional cases, known as Scholarscam II. The Commission
obtained the most recent settlements in the fall of 1998. These
cases were filed in Federal district courts in Florida,
Maryland, Georgia, and New York, and a summary of these cases
can be acquired as an appendix to my written statement.
The Commission sought and obtained temporary restraining
orders with asset freezes, and in some cases the appointment of
a receiver over the corporate defendants. All Commission
litigation has been concluded, with permanent injunctions
obtained either through settlements or ordered by the court.
The orders either ban the defendants from telemarketing or
providing scholarship services, or they require the defendants
to post a performance bond in a significant amount. In several
instances, the Commission obtained partial or complete redress
for consumers, and in two cases the defendants posted $100,000
telemarketing bonds pursuant to Florida law.
We estimate that the companies involved in these scams have
scammed, in total, approximately 175,000 consumers, to the tune
of about $22 million. Tough penalties are needed for these scam
artists. The civil remedies afforded by an FTC action can
deprive defendants of their ill-gotten gains through
restitution, but only if the victims' money can be found.
The penalties resulting from criminal prosecutions by the
U.S. Department of Justice and State authorities sends the
strongest possible message, which is particularly needed here
because there is a never-ending pool of potential victims,
college-bound students and their families.
The Commission has undertaken extraordinary efforts to
educate consumers about scholarship scams. As part of this
effort, we teamed up with a variety of private and public
partners, including Sallie Mae, Who's Who Among American High
School Students, the College Board, and the Educational Testing
Service, which administers the SAT exams.
Our consumer education materials include bookmarks,
posters, and consumer alerts warning students and their parents
of the red flags to look for when evaluating scholarship
service sales material and sales pitches. The six signs that
your scholarship is sunk are the scholarship is guaranteed or
your money back. You can't get this information anywhere else.
Number three, may I have your credit card or bank account
number to hold this scholarship. Number four, we will do all
the work. Number five, the scholarship will cost some money.
Number six, you have been selected by a national foundation to
receive a scholarship, or you are a finalist in a scholarship
contest.
We have distributed over 2.5 million pieces of consumer
education materials, including mass mailings of bookmarks
listing these six red-flag signs, to 2,000 college bookstores
across the country, and have materials posted on our Web site.
In addition, we have posted a Web page of a fictitious
scholarship service company that had typical claims that we saw
in our cases. And when consumers clicked to sign up for the
services, they were warned that they too could be scammed. We
call these teaser Web site pages, and we have used these to
help disseminate our message on the Internet.
The Commission continues to monitor the industry and to
provide both consumer and business education. In May this year,
we issued a new consumer alert to inform consumers about a
recent trend, the seminar for financial aid or scholarships.
Instead of telemarketing, the scam artists now invite students
and their families to a free seminar in some local hotel and
then give them a hard sales pitch to get them to sign up for
the scholarship service at a fee of approximately $800 to
$1,200, which is quite a lot of money for some families.
The story of Project Scholarscam has garnered tremendous
coverage in the media, and through this coverage and by
enlisting those who are on the front lines, financial aid
advisers and guidance counselors, we have spread the word about
these pernicious scams. We hope the Commission's strong record
of enforcement and education has served as an effective
deterrent in this industry. But as education costs continue to
rise, and given the unlimited supply of potential victims,
fraudulent operators will always have an interested audience
and an enticing sales pitch. Thus, we will continue our
efforts, and we will also continue to provide cooperation to
any criminal investigation or prosecution of a Scholarscam
defendant.
Thank you.
Senator Abraham. Thank you very much. Actually, during the
last year I have visited a number of campuses in our State with
those do's and don't's lists to try, on a campus-by-campus
basis, to make sure we got more information out. I have visited
several throughout the State and hope to do more of them, and
tried to point out why each of those statements you read
clearly couldn't possibly be true--the idea that you don't have
to do any work yourself and that somehow a scholarship is going
to be made available, things like that.
[The prepared statement of Ms. Anthony follows:]
Prepared Statement of Sheila F. Anthony
I. INTRODUCTION
Mr. Chairman and members of the Subcommittee, I am Sheila F.
Anthony, a Commissioner of the Federal Trade Commission (``FTC'' or
``Commission''). I am pleased to have this opportunity to describe the
Commission's consumer protection activities in the area of scholarship
services.\1\ The Commission applauds Senator Abraham and Senator
Feingold for focusing on the serious law enforcement issues raised by
fraudulent purveyors of scholarship services.
---------------------------------------------------------------------------
\1\ This written statement presents the views of the Federal Trade
Commission. Responses to questions reflect my views and do not
necessarily reflect the views of the Commission or the other
Commissioner.
---------------------------------------------------------------------------
II. THE COMMISSION'S CONSUMER PROTECTION MISSION
The FTC is a law enforcement agency whose mission is to promote the
efficient functioning of the marketplace by protecting consumers from
unfair or deceptive acts or practices and increasing consumer choice by
promoting vigorous competition. The Commission's primary legislative
mandate is to enforce the Federal Trade Commission Act (``FTCA''),
which prohibits unfair methods of competition and unfair or deceptive
acts or practices in or affecting commerce.\2\ The FTCA generally
provides the Commission with broad law enforcement authority over
entities engaged in, or whose business affects, commerce and with the
authority to gather information about such entities.\3\ The Commission
also has responsibility under approximately forty additional statutes
governing specific industries and practices.\4\
---------------------------------------------------------------------------
\2\ 15 U.S.C. Sec. 45(a).
\3\ 15 U.S.C. Sec. Sec. 45(a), 46(a).
\4\ These include,, for example, the Truth in Lending Act, 15
U.S.C. Sec. Sec. 1601 et seq., which mandates disclosures of credit
terms, and the Fair Credit Billing Act, 15 U.S.C. Sec. Sec. 1666 et.
seq., which provides for the correction of billing errors on credit
accounts. The Commission also enforces over 30 rules industries and
practices.
---------------------------------------------------------------------------
III. PROJECT SCHOLARSCAM
In the fall of 1996, the Commission launched ``Project
Scholarscam,'' a joint law enforcement and consumer education effort
aimed at fraudulent purveyors of so-called ``scholarship services.'' At
that time, the Commission announced six law enforcement cases against
companies we alleged falsely promised scholarships to students and
their parents nationwide. In November 1997, the Commission followed up
with two additional cases known as ScholarScam II. The Commission
obtained the most recent settlements in the fall of 1998.
These companies employed similar tactics: the sales pitch usually
started with a postcard proclaiming ``FREE MONEY FOR COLLEGE'' and
providing a toll free number for students or their parents to call. A
telemarketing sales pitch ensued whereby the company told students and
parents that, for an up-front fee $100 to $400, the defendant would
guarantee that the student would get a scholarship or the company would
refund the up-front fee. To further entice the students, telemarketers
claimed the student had prequalified for scholarships and that the
company would ``do all the work'' necessary to obtain the scholarship.
Getting the scholarships was easy, the telemarketers explained, because
the company would match the student's qualifications with a database of
scholarships and would send the student a list of sources tailored to
that student. The telemarketers proclaimed that the company had
``information you can't get anywhere else.''
Naturally, the telemarketer would impress upon the student the need
to act quickly and typically would press the student or parent to
provide over the telephone a credit card number or checking account
number. Once students and their parents paid the up-front fee, they
would complete a questionnaire detailing their interests, school
activities and other personal information. Subsequently, they would
receive a list of available scholarships and sources of money--but the
list was hardly ``tailored'' to the student's qualifications. In fact,
as the Commission alleged, it was a useless list--containing outdated
information, scholarships whose deadlines had passed, entries that were
not even scholarships but were student loan programs, and scholarships
that the student clearly could not qualify for (for example, a
scholarship for children of veterans or residents of a particular state
when the student was neither).
When consumers sought refunds for these useless lists, the
defendants foiled their attempts by putting hurdles up at every turn
instead of honoring their much-heralded and unconditional ``money-back
guarantee.'' Students were required, the defendants said, to apply to
each and every source on the list and to obtain and send to the company
all rejection letters received. In reality, this was an impossible
condition to fulfill because scholarship organizations typically notify
only those who are selected as recipients. In addition, because the
list contained scholarships for which the students could not qualify,
students had no reason to apply to those sources. In one FTC case, the
defendant stopped providing any lists at all--leaving consumers to
write futile complaint letters to a nonexistent ``scholarship
foundation.''
These cases were filed in federal district courts in Florida,
Georgia, Maryland, and New York. A summary of these cases is provided
to the Committee as an Appendix to my written statement. The Commission
sought and obtained temporary restraining orders with asset freezes
and, in some cases, the appointment of a receiver over the corporate
defendants. All Commission litigation has been concluded with permanent
injunctions obtained either through settlements or ordered by the
court. The orders obtained either ban defendants from engaging in
telemarketing or providing scholarship services or require defendants
to post performance bonds in significant amounts to protect consumers
from future fraudulent practices should defendants resume telemarketing
of scholarship services.
In several instances, the Commission obtained partial or complete
redress for consumers. In two cases, the defendants posted $100,000
telemarketing bonds pursuant to Florida law, which requires all
telemarketers to make such commitments. We worked with the Florida
Department of Agriculture and Consumer Services to revoke the bonds
and, for the first time, Florida consumers received refunds derived
from a Florida telemarketing bond. In another case, as part of the
settlement, the defendant relinquished mail containing checks from
almost 500 consumers which enabled the Commissioner to provide full
refunds to those consumers. In many FTC cases, however, the defendants
have depleted the monies received, leaving little, if any, for consumer
redress. In addition, FTC defendants frequently attempt to use
bankruptcy laws to avoid paying consumer redress required by our
orders.
We estimate that the companies involved in these cases scammed, in
total, approximately 175,000 consumers to the tune of $22 million. In
addition, one of the Scholarscam defendants, Christopher Nwaigwe, was
criminally prosecuted by the U.S. Attorney's Office in Baltimore,
Maryland. Commission staff provided substantial assistance to the U.S.
Attorney's Office, including having a staff attorney testify at trial.
Nwaigwe was convicted of seven counts of mail fraud in March of this
year and in June was sentenced to 36 months in prison. Tough penalties
are needed for these scam artists. The civil remedies afforded by an
FTC action can deprive defendants of their ill-gotten gains through
restitution, but only if the victim's money can be found. The penalties
resulting from criminal prosecutions by the U.S. Department of Justice
and state authorities send the strongest possible message, which is
particularly needed because there is a never-ending pool of potential
victims: college-bound students and their parents.
The Commission has undertaken extraordinary efforts to educate
consumers about scholarship scams. As part of this effort, we teamed up
with a variety of private and public partners, including:
Sallie Mae
College Parents of America
Who's Who Among American High School Students
The College Board
Educational Testing Service
National Association of Student Financial Aid Administrators
National Association of Secondary School Principals
National Association of College Stores
Our consumer education materials include bookmarks, posters, and
consumer alerts warning students and their parents of the red flags to
look for when evaluating scholarship service sales materials and sales
pitches. We have distributed over 2\1/2\ million pieces of our consumer
education materials, including a mass mailing of bookmarks to 2,000
college bookstores across the country and have the materials posted on
our Web site. In addition, we posted a Web page of a fictitious
scholarship service company that had the typical claims we saw in our
cases and, when consumers clicked to sign up for the service, they were
warned that they could have been scammed. We call this a ``teaser Web
site'' and have used it to help disseminate our message on the
Internet.
The Commission continues to monitor the industry and to provide
both consumer and business education. In May, we issued a new Consumer
Alert to inform consumers about a recent trend: the seminar for
financial aid or scholarships. We warn consumers to take their time
when attending these seminars and to avoid high-pressure sales pitches
that require them to buy now or risk losing out on the opportunity.
Consumers should investigate the organization by talking with a high
school or college guidance counselor or financial aid advisor before
spending money--many colleges and universities are offering Web-based
scholarship searches for free to potential students. Consumers
shouldn't rely solely on ``success stories'' or testimonials of
extraordinary success offered by the seminar company. Instead, they
should ask for a list of three local families who have used the service
in the last year and then contact them to find out if they were
satisfied with the products and services received. As always, consumers
should keep in mind that they may never recoup the money they give to
an unscrupulous operator, despite stated refund policies.
IV. PROPOSED LEGISLATION
S. 1455, the ``College Scholarship Fraud Prevention Act of 1999,''
provides some useful tools to help combat scholarship fraud. It would
enhance criminal penalties for fraud in connection with the obtaining
or providing of scholarships. Also, it would prevent purveyors of
college scholarship fraud from using the bankruptcy laws to shield
their ill-gotten gains while their victims go without recompense. The
Bankruptcy Code allows debtors to retain certain property even when
their creditors receive little or no recompense. In particular, debtors
can use state-law exemptions, including homestead exemptions that in
some states can have no dollar limit, to shield their assets. S. 1455
would deny these exemptions to the extent that debts resulted from
college scholarship fraud.
V. CONCLUSION
The story of Project ScholarScam has garnered tremendous coverage
in the media. Through this coverage and by enlisting those who are on
the front lines--financial aid advisors and guidance counselors--we
have spread the word about these pernicious scams. The Commission's
strong record of enforcement and education has served as an effective
deterrent in this industry. But, as education costs continue to rise
and, given the unlimited supply of potential victims, fraudulent
operators will always have an interested audience and an enticing sales
pitch. Thus, we will continue our efforts and will also continue to
provide cooperation to any criminal investigation or prosecution of
``ScholarScam'' defendants.
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Senator Abraham. So we will turn now to Ms. O'Flaherty
here, and she will undoubtedly reinforce the notion that
students will be getting scholarships without having done a
lick of work themselves because that probably doesn't happen at
Western Michigan.
STATEMENT OF SUSAN O'FLAHERTY
Ms. O'Flaherty. It doesn't happen.
Senator Abraham. Thank you for being here.
Ms. O'Flaherty. Thank you. I appreciate this opportunity. I
must tell you how personally and professionally pleased I am to
see a bill that is focused on creating greater protection for
consumers against scholarship fraud. I applaud your efforts and
Senator Feingold's efforts, and I offer you my support and
assistance as this legislation makes its way through the
Senate.
I am Director of Financial Aid and Scholarships at Western
Michigan University, in Kalamazoo, MI. Western Michigan enrolls
over 27,000 students, 72 percent of whom receive some form of
financial aid. Student loan volume at Western approaches $70
million. So as you might imagine, helping students locate and
ultimately obtain non-loan dollars such as scholarships is of
primary interest to our university.
Just so that you are aware, I have been in financial aid
most of my life and in various parts of the country, and I
could not count the number of financial aid and scholarship
nights that I have done for parents and high school counselors.
And I don't recall any such event in which this issue has not
been raised during all of those years.
The need for action on this issue cannot be overstated.
Scholarship fraud is out there; it is rapidly evolving with
new, innovative scams and is scaring off students and
legitimate services who must suffer because of the acts of an
unscrupulous population. I believe the problem is best exposed
through examples, and I will share a few of those with you. You
may be aware of some of these cases, as they are becoming more
public. I would like to make you aware that these are not cases
from press accounts, but cases and descriptions of situations
that have occurred in my office.
My staff and I have spoken with families who have received
a mailing that boasts that in exchange for $12.95, they would
be guaranteed money for college. What they receive is a list of
scholarships available in the area, and mostly general
information about applying for financial aid through the
regular process.
It surprised me to hear about this particular opportunity
because we normally see this type of guarantee associated with
a charge of anywhere from $49.99 to $500. Our discussion in the
office was that by lowering the charge to $12.95, the scam
artist could get a significant number of bites and their
revenues would increase dramatically on the high-volume
business. This is an interesting point to me and I feel real
strong about the advertisement of this type of thing to
families because very often high-cost charges are associated
with scams, versus the low-cost charges.
We have seen high school seniors receive letters on red,
white and blue letterhead with an official-looking seal,
inviting them to send money and complete a profile. They
guarantee funds for college. What the students receive is a
list of names that they have to contact requesting an
application. Any scholarship search, good or bad, must rely on
the student or family to do all the work.
The actual match is the easy part. Once a student receives
a list of matches, they must contact each donor and obtain the
application, criteria and deadline information. After
completing the application, they need to mail the form. There
are no requirements that donors respond to each applicant, so
there is no guarantee that the student will ever hear from a
particular donor.
More typically, the scholarship organization will only
notify the winners. For scholarship search organizations who
advertise a money-back guarantee, the fine print will normally
say something like students must apply for all scholarship
matches and receive a negative response back from each source
before a refund will even be considered.
Another one that is very popular these days is an approach
for a college night offered by College Forum, a national
college program. I personally have been approached by this for
one of my own children. We are asked to call an 800 number and
reserve a place on an already preassigned date and location,
and they do offer help with assistance for the admissions and
the financial aid for a mere $650.
I can go on with more of those, but in my experience I have
spoken with many families from a variety of incomes who have
fallen prey to these scholarship scams. I have spoken with
families who are bright and educated themselves, who are just
inquiring about what scholarship search organizations can be
trusted enough to recommend, without getting into a dialogue
about the mysteries and myths of financial aid.
We speak to many low- and middle-income families who, for
one reason or another, do not have the savings necessary for
their children's education and are just seeking any possible
way to find help. They understand the value of higher education
today and want that for their children. Families waste good
money on scholarship search scams that could have been used for
college expenses. It seems to me that these companies prey on
exactly the kind of family that Congress took such great care
to ensure access to funds for higher education by eliminating
the fee that used to be associated with filing the financial
aid application.
In terms of Senate bill 1455, I support the greater
penalties for those convicted of these crimes, which I believe
will have a cooling effect on the fraudulent element of the
financial assistance industry. We recognize that there are
organizations that provide good services for students, but urge
that consumers continue to be educated on how to detect
potential fraud companies.
Above all else, scholarship searches are nothing more than
a database match. The only thing that a company, good or bad,
can supply a student with is a list of possible opportunities.
It is the consumer that has to do the work and the follow-up
with every possible donor.
I also support the bill's provisions which seek to raise
public awareness of scam artists. In my opinion, families, aid
administrators and high school counselors would welcome a
centralized Internet source that identifies businesses that go
through some kind of screening process. Collections of
information similar to Mr. Kantrowitz' Web site are a valuable
resource, and the information contained within these resources
should be made available through multiple media. The Department
of Education already has a mechanism in which it communicates
to all financial aid applicants who submit a FAFSA. Although
the timing may not work out, this may be a means of providing
some information to a public seeking assistance.
I would like to offer one suggestion to further enhance
student protection. Just as colleges and universities that
receive Federal funds must meet certain requirements in order
to participate in Federal programs, it seems to me that a
company providing match results that include Federal programs
should also be required to disclose certain information to
applicants in clear and understandable terms. They should be
required to state up front how families can obtain free
information about the Federal programs without paying for the
match. The price, so to speak, for these companies to use
Federal information in their scams should be the requirement
that they direct students to a variety of free sources of
information in their marketing literature.
Again, I thank you for this opportunity to speak to you
about this topic today and I would be happy to answer any
questions you may have.
Senator Abraham. Thank you very much.
[The prepared statement of Ms. O'Flaherty follows:]
Prepared Statement of Susan O'Flaherty
Mr. Chairman, members of the Senate Judiciary Committee, thank you
for the invitation to speak to you today regarding Senate bill 1455,
the Scholarship Fraud Prevention Act of 1999. I appreciate this
opportunity and must also tell you how personally and professionally
pleased I am to see a bill that is focused on creating greater
protection for consumers against scholarship fraud. I applaud the
efforts of Senators Abraham and Feingold, and I offer them my support
and assistance as this legislation makes its way through the Senate.
I am Director of Financial Aid and Scholarships at Western Michigan
University in Kalamazoo, Michigan. Western Michigan University enrolls
over 27,000 students, 72 percent of whom receive some form of financial
aid. Student loan volume at Western Michigan alone approaches $70
million dollars; as you might imagine, helping students locate and
ultimately obtain ``non loan'' funds, such as scholarships, is of
primary interest to my university, and to me personally.
Before I begin my actual testimony, I want to let you know that I
have worked in financial aid since 1973 and have had the opportunity of
not only working for Western Michigan University but also for the
University of Colorado, California Polytechnic State University and
several private colleges in the East where I grew up.
I could not count the number of financial aid and scholarship
workshops I have facilitated to families and also to high school
guidance counselors over those years. I can tell you that I honestly
cannot recall one workshop in which a parent or a high school guidance
counselor did not raise a question about scholarship search
opportunities and which ones were ``good ones''. In my experience it is
clearly an issue for many, many families.
The need for action on this issue cannot be understated;
scholarship fraud is out there, it is rapidly evolving with new,
innovative scams, and it is scaring off students and legitimate
services who must suffer because of the acts of an unscrupulous
population. I believe the problem is best exposed through examples, and
at this point I would like to share some of my personal experiences
with various, questionable scholarship search approaches. You may be
familiar with several of these cases, as they have affected literally
thousands of students across the country, and most have received some
degree of press attention. However, I'd like to make it clear that I am
not relaying press accounts; each of these descriptions represent
personal situations that families have shared with my office.
My staff and I have spoken with many families who have
received a mailing boasting that in exchange for $12.95, they
would be guaranteed money for college. What they in fact
received was a list of scholarships available in their area,
and general information about applying for financial aid
through the FAFSA, the Free Application for Federal Student
Aid. It surprised me to hear about this particular
``opportunity'' because we normally see this type of guarantee
costing families anywhere from $49.99 to $500. However, after
discussion with my staff, we came to the obvious business
conclusion that was reached much earlier by the crooks--that by
lowering the charge to $12.95, these scam-artists would get a
significant number of ``bites''--and their revenues would
increase dramatically on high-volume ``business''. I think this
is interesting and important in part because it illustrates
that not all scholarship scams can be identified as being
``high-cost''. Furthermore, in this example, the student is
guaranteed ``money'', not ``scholarships''--but truth of the
matter is that all students are eligible for either a
subsidized or unsubsidized federal student loan. The guarantee
has been met, but by the Federal Government, not the scam
artist. The student paid for information that is already
available to them free of any charge.
``Come to a night about paying for college'' is a standard
advertising hook-phrase in this industry, and quite often,
these programs are held in a rented facility on a college
campus. The college financial aid office typically does not
authorize these programs, but parents and students commonly
hold the perception that if the workshop is held on a college
campus, then it must be legitimate. I am hopeful that many
colleges will catch on to this scam, as these organizations
prey on the fact that it is not unusual for legitimate
financial aid seminars to be held on campus. And the goal of
these programs? To convince people that for a fee, funds can be
secured.
We have seen high school seniors receive letters on red,
white and blue letterhead with an official-looking seal
inviting them to send money and complete a profile form for
scholarship dollars. They guarantee funds for college. What the
student receives is a list of names that they then have to
contact requesting an application. Any scholarship search, good
or bad, must rely on the student or family to do a lot of the
work. The actual match is the easy part. Once the students
receive the list of matches, they must contact each donor and
obtain the application, criteria, and deadline information.
After completing the application for each donor, they then need
to mail the form. There are no requirements that donors respond
to each applicant so there is no guarantee that the student
will ever hear from a particular donor. More typically the
scholarship organization will only notify the winners. For
scholarship search organizations who advertise a money back
guarantee, the fine print will normally say something like:
``student must apply for ALL scholarship matches (including
doing all the work as indicated above) and receive a negative
response from each source before a refund application can be
processed''.
Another current and popular approach these days is the
scholarship search that is attached to a ``college night''
program offered by some ``National College Program''. In this
case, the families are asked to call an ``800'' number and
reserve a place on an already pre-assigned date and location.
These are often at hotels within an hour or so of the family
residence. In this case, they are offered assistance with the
admissions application AND for finding funds for going to
college. I have heard of costs as high as $650 in this case.
You may have seen the segment on a recent news program
highlighting problems that families have encountered.
One especially innovative scam is accomplished through tying
the scholarship dollars to a life insurance policy. In this
example, families are urged to sign up for a life insurance
policy and in exchange their student-children are guaranteed
funds for college. Once again, those ``funds'' are those
federal funds that the student would normally receive by
applying through the FAFSA.
In my experience, I have spoken with many families from a variety
of incomes who have fallen prey to these scholarship scams. I have
spoken with families who are bright and educated themselves, who are
just inquiring about what scholarship search organizations can be
trusted enough to recommend. Without getting into a dialogue about the
``mysteries and myths of financial aid'', we speak to many low and
middle income families who for one reason or another do not have the
savings necessary for their children's education and are just seeking
any possible way to find help. They understand the value of a higher
education today and want that for their children. Families waste good
money on scholarship search scams that could have been used for college
expenses. It seems to me that these companies prey on exactly the kind
of family that Congress took such great care to ensure access to funds
for higher education by eliminating the fee that used to be associated
with filing a financial aid application.
In terms of the Senate bill 1455, I support a greater penalty for
those convicted of these crimes, which I believe will have a ``cooling
effect'' on the fraudulent element of the financial assistance
industry. We recognize that there are organizations that provide good
services for students but urge that consumers continue to be educated
on how to detect a potential fraud company. Above all else, scholarship
searches are nothing more than a data base match. The only thing that
any company, good or bad, can supply a student with is a list of
possible opportunities. It is the consumer that has to do the work and
follow up with every possible donor. How can a company guarantee funds
based on the consumer needing to do extensive follow up? In my opinion,
there can never be a guarantee of any type associated with any
scholarship search. As criteria and as a warning for consumers, it
should be an automatic sign of possible fraud.
I also support the bill's provisions which seek to raise public
awareness of scam artists. In my opinion, families, aid administrators,
and high school counselors would welcome a centralized Internet source
that identifies businesses that go through some kind of screening
process. Collections of information similar to Mr. Kantrowitz's website
are a valuable resource, and the information contained within these
resources should be made available through multiple media. The
Department of Education already has a mechanism in which it
communicates to all financial aid applicants who submit a FAFSA.
Although the timing may not work out in all cases, the FAFSA
application process it may be a way to provide general information to a
public that is already seeking assistance.
I would like to offer one suggestion to further enhance student
protections. Just as colleges and universities that receive federal
funds must meet certain requirements in order to participate in the
federal programs, it seems to me a company providing match results that
include federal programs should also be required to disclose certain
information to applicants in clear and understandable terms. They
should be required to state up-front how families can obtain free
information about the federal programs without paying for the match.
The ``price'', so to speak, for these companies to use free federal
information in their scam should be the requirement that they direct
students to a variety of free sources of information in their marketing
literature. Mr. Chairman, I again thank you and the cosponsors of this
legislation for providing a forum in which we may discuss this
important issue, and I would be happy to answer any questions you or
any other Senator may have.
Senator Abraham. As you all have heard some bells going off
behind you the last couple of minutes, there is a vote taking
place on the Senate floor right now which I have to go cast. So
what I am going to do is just temporarily recess the hearing
before we hear from our last two panelists here while I run
over, vote and come back. I hope that won't take very long, but
please bear with us and we will resume the hearing very
shortly.
[The committee stood in recess from 2:35 p.m. to 2:50 p.m.]
Senator Abraham. We will resume the hearing at this time.
As everybody can see, we have been joined by Senator Feingold,
who is the other original cosponsor of this legislation, and I
appreciate his support. As always, when we work together on
things, I appreciate that as well.
What we are going to do is let our final two witnesses
testify or make your statements and then we will turn to
Senator Feingold for his statement and then we will pursue
questioning after that.
So it is your turn, Mr. Kantrowitz. We appreciate your
being here today, and welcome you and turn to you for your
statement at this time.
STATEMENT OF MARK KANTROWITZ
Mr. Kantrowitz. Mr. Chairman, I thank you for convening
this hearing on 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, free resources that exist to aid
students in navigating the sea of financial aid and to combat
the type of fraud the Abraham-Feingold legislation addresses.
The FinAid site had more than 2 million visitors last year. 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 annually. These are conservative
estimates. The most common types of scholarship scams include
scholarships for profit and guaranteed scholarship search
services.
The first type charges an application fee for scholarships
that never materialize or are less than advertised or disburses
less money in scholarships than is received in application
fees. They make a profit off of the scholarships. The second
type charges a fee to match student information against a
database of scholarships and guarantees that the student will
actually receive money. There are other types such as Susan
mentioned where they have seminar scams. My cat receives
invitations for these all the time.
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, first, the unclaimed aid myth which
falsely states that millions or billions in aid went unclaimed
last year and promises to get the student their fair share.
This is an extremely pernicious myth because it not only
defrauds consumers, but it also suggests to private sector
benefactors that there is no need for them to create new
scholarships. After all, if money is unclaimed, they don't need
to create new ones.
Second, bogus guarantees which often include restrictions
that render them meaningless, such as requiring the student to
submit rejection letters--sponsors do not provide students with
rejection letters; they only notify the winners--or which
include Federal aid as part of the total.
And, third, false claims of government or Better Business
Bureau approval. One scam even created its own bogus BBB.
Others misrepresent the nature of their business by using an
eagle and a formal seal as a logo or words like ``national,''
``administration,'' ``foundation'' and ``federal'' in their
names.
I support the College Scholarship Fraud Prevention Act
because it addresses the problem through a combination of law
enforcement and consumer education. I would like to suggest a
few ways in which the legislation could be enhanced.
First, in section 5, restrict the listings to organizations
that provide information and services for free, at no charge to
the student. The Higher Education Act already includes such a
requirement. There are numerous high-quality sources of free
information about financial aid, including the FinAid, Fast-
Web, College Board, and Peterson's Web sites.
Second, in section 5, require the organizations to publish
a privacy policy on their Web sites, and require the
organizations to provide the consumer with the ability to opt
out of any mailing lists as part of the registration process.
Third, in section 5, allow the U.S. Department of Education
to exclude businesses which are being prosecuted by State
attorneys general, not just the FTC.
Fourth, in section 5, give the U.S. Department of Education
broader discretionary power in determining which organizations
should not be listed, since a listing on the ed.gov Web site
will be viewed by consumers as an implicit endorsement.
Fifth, in section 5, add language directing the U.S.
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 the
legitimacy of a particular financial aid business.
Sixth, expand the language of the legislation to include
organizations that provide information about student financial
aid, in addition to organizations that claim to offer financial
assistance.
An additional idea for improving the legislation concerns
scholarships for profit or organizations that offer
scholarships with an application fee. Students apply for these
awards thinking that the organization is involved in
philanthropy when, in reality, the organization is enriching
itself through the application fees. Philanthropy should be
about giving money, not getting money. I recommend making it
illegal to misrepresent what amounts to little more than a
raffle or a lottery as a scholarship by making it illegal to
charge student fees to apply for scholarships. If they want to
call it a scholarship or fellowship, they must not be allowed
to charge students any fees.
Alternatively, I would recommend requiring any organization
that charges students an application fee for scholarships to
disclose certain information on the application form and to the
general public, including the number of applicants, the total
application fee revenue, and the total amount disbursed in
scholarships. The consumer can then use this to see that the
organization is making a profit off of the scholarship.
Mr. Chairman, I once again thank you and the committee for
taking an interest in the issue of student 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.
Senator Abraham. Thank you very much, and we will look
closely at your recommendations as we move forward
legislatively.
[The prepared statement of Mr. Kantrowitz follows:]
Prepared Statement of Mark Kantrowitz
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'', it 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 percent success rate. The National
Post-secondary Student Aid Study (NPSAS) conducted by the
National Center for Education Statistics at the U.S. Department
of Education found that only one in twenty-five students (4
percent) 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 U.S. 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 S. 1455, 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 U.S. 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 U.S. Department of Education to
exclude businesses which are under investigation or being
prosecuted by State Attorneys General.
In section 5, give the U.S. 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 U.S. 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 percent 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 S.
1455 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.
Senator Abraham. Mr. Bery, we welcome you. Thank you for
being here today. We will turn to you for your testimony.
STATEMENT OF SANJEEV BERY
Mr. Bery. Thank you, Senator Abraham and Senator Feingold,
for offering me this opportunity to testify, as well as thank
you for introducing this legislation. My name is Sanjeev Bery
and I am the higher education associate for U.S. PIRG, U.S.
Public Interest Research Group.
The U.S. PIRG Higher Education Project works to expand
access to higher education. We do so by advocating for
increased funding for need-based student aid, lower-cost
student loans, and better service for students who are served
by Title IV of the Higher Education Act. U.S. PIRG endorses
Senate bill 1455, the College Scholarship Fraud Prevention Act
of 1999. I am the U.S. PRIG representative tasked with
advocating support of this bill, and thank you again for
introducing this legislation.
It is my pleasure to talk to you today regarding the
subject of fraudulent college financial assistance services. My
experience with college scholarship fraud began with personal
experience. In 1994, I was a senior at Fred C. Buyer High
School in Modesto, CA. At the time, I was applying to college
and looking for sources of financial aid.
During that period of time, my parents received a postcard
in the mail advertising a scholarship service. The company was
named CAP, College Academic Planning, Incorporated. CAP's
services seemed straightforward. In return for a $200 fee, I
would receive a detailed list of scholarships tailored to my
future background and future plans.
Despite the heavy price tag, my parents and I decided to go
ahead with the service. Though $200 is indeed a lot of money,
we thought that if we were missing out on opportunities to
apply for scholarships that I didn't already know about, that
would be a problem and something not to miss out on. So my
parents went ahead and paid the $200 fee.
I then spoke on the phone with a CAP representative who
asked me about my background and academic plans. Sometime
later, I received a booklet in the mail with the results of
CAP's so-called personalized scholarship search. The product we
received in return for our $200 was of the poorest quality. The
scholarships listed had absolutely nothing to do with either my
personal background or my college pursuits.
While I intended to study political science, I received a
list of scholarships dealing with how to apply for scholarships
dealing with med school. While I am of Indian descent, my
parents having been born in India, I also received a list of
scholarships on how to apply for Native American scholarships.
So when we looked into the refund policy, it became clear
that we had been ripped off. According to CAP, we would receive
a refund if we provided proof that I had unsuccessfully applied
to each of the scholarships they had given information on. But
obviously with none of the scholarships really relevant to me
or my personal needs at all, it would have been a complete
waste of time to do so, even if the scholarship companies had
actually responded and said that I was rejected.
In some cases, I didn't even meet the qualifications to
actually apply for the scholarships, as in the case of the
Native American scholarships. This made it a complete waste of
time to apply to each and every scholarship that they provided.
Not knowing of any other alternative, we decided to accept our
$200 loss.
At the time, I had no idea that thousands of other high
school students across the country and their parents were
becoming victims of the same company's fraudulent practices.
When the Federal Trade Commission shut down CAP through legal
action in 1997, it became known that over 30,000 students and
families across the country were similarly ripped off. CAP
earned over $6 million in net sales through its fraudulent
practices, charging families for a product that had lots of
promise but little actual value.
I went on to study at the University of California at
Berkeley. Though I would never hear from CAP again, I know that
during my 4 years as an undergraduate, many of my fellow
classmates must have fallen prey to the same fraudulent
schemes.
At UC-Berkeley, like many other college campuses across the
country, scholarship services place their offers on bulletin
boards and mail them to students. As mentioned in other
testimony today, the ads often wrongly state that millions of
dollars in scholarship aid go unclaimed each year. Some even
falsely guarantee that students or parents who pay the
application fee and participate will automatically qualify for
a scholarship.
Many students are extremely vulnerable to these kinds of
tactics. Over the past 20 years, the need for student aid has
skyrocketed as enrollments and college costs have risen.
Unfortunately, Federal student aid programs like the Pell
Grants have not kept pace. This forces many low-income students
to work long hours and take out large loans to pay for college.
In this kind of environment, any promise of scholarship aid is
difficult to resist.
I strongly support your efforts to protect students and
fight this fraud. Senate bill 1455, the College Scholarship
Fraud Prevention Act of 1999, will go a long way toward
stopping this type of criminal behavior.
Thank you, Senator Abraham and Senator Feingold, for
introducing this legislation and for giving me the opportunity
to testify.
Senator Abraham. Thank you, Mr. Bery.
[The prepared statement of Mr. Bery follows:]
Prepared Statement of Senjeev Bery
Thank you, Chairman and Senators, for the opportunity to testify
before this committee. My name is Sanjeev Bery, and I am the Higher
Education Associate for U.S. PIRG, the U.S. Public Interest Research
Group. U.S. PIRG is the national lobby office for the state PIRG's. The
State PIRG's are student-led public interest organizations in 25 states
across the country.
The U.S. PIRG Higher Education Project works to expand access to
higher education. We do this by advocating for increased funding for
need-based student aid, lower-cost student loans, and better service
for students who are served by Title IV of the Higher Education Act.
U.S. PIRG endorses Senate Bill 1455, The College Scholarship Fraud
Prevention Act of 1999. I am the lead person at U.S. PIRG responsible
for advocating in support of this bill.
It is my pleasure to talk to you today regarding the subject of
fraudulent college financial assistance services. My experience with
scholarship fraud begins with personal experience. In 1994, 1 was a
senior at Fred C. Beyer High School in Modesto, California. At the
time, I was applying to college and anxiously awaiting a response from
several universities. While finishing the application process, I was
also focused on finding sources of financial aid. Because of this, I
made it a priority to research scholarships, and apply to those that I
might qualify for.
During that period, my parents received a postcard in the mail
advertising a scholarship service. The company was named CAP, College
Academic Planning, Inc. CAP's services seemed straightforward--in
return for a $200 fee, I would receive a detailed list of scholarships
tailored to my personal background and future plans. Despite the heavy
price tag, my parents and I decided to go ahead with the service. At
the time, we viewed it as an investment. Though $200 is a significant
amount of money, I could not pass up the opportunity to receive much
needed financial aid.
So my parents went ahead and paid the $200 fee. I then spoke on the
phone with a CAP employee, who asked me about my background and
academic plans. Sometime later, I received a booklet in the mail with
the results of CAP's personalized scholarship search.
The product we received in return for our $200 was of terrible
quality. The scholarships listed had absolutely nothing to do with my
background or planned future pursuits. While I intended to study
political science, the booklet provided by CAP contained scholarships
for students pursuing medicine. While I am of Indian descent, my
parents having been born in India, the scholarship company provided
information on scholarships for Native Americans.
When we looked into the refund policy, it became clear that we had
been ripped off. According to CAP, we would only receive a refund if we
provided proof that I had unsuccessfully applied to each of the
scholarships they had given information on. None of the scholarships
included in the booklet were of any relevance to my background or
planned pursuits, academic or otherwise. In some cases, I actually did
not even meet the basic criteria for applying. To apply to a series of
scholarships that requested written essays and a variety of other
materials, knowing full well that there was little chance I would
qualify for anything, would have been a total waste of time. Not
knowing of any other alternative, we accepted our $200 loss.
At the time, I had no idea that thousands of other high school
students and their parents were becoming victims of the same company's
fraudulent business practices. When the Federal Trade Commission shut
CAP down through legal action in 1997, it became clear that at least
30,000 other families had also been ripped off. CAP earned over $6
million in net sales through its fraudulent practices, charging
families for a product that had lots of promise, but no value.
I went on to study at the University of California at Berkeley.
Though I would never hear from CAP again, I know that during my four
years as an undergraduate, many of my fellow classmates must have
fallen prey to similar fraudulent schemes. At UC Berkeley, like many
other college campuses, scholarship services placed their offers on
bulletin boards and mailed. them to students. The ads often claimed
that millions of dollars in scholarship aid went unclaimed each year.
Some even guaranteed that students who participated would qualify for a
scholarship. The ads were often personalized, making use of mail order
lists that provided students' names, interests, and contact
information.
Many students are extremely vulnerable to these kinds of tactics.
Over the past 20 years, the need for student aid has skyrocketed as
enrollment and college costs have risen. Unfortunately, federal student
aid programs like the Pell Grant have not kept pace. This forces many
low-federal students to work long hours and take out large loans to pay
for college. In this kind of environment, any new promise of
scholarship aid is difficult to resist. I would go so far as to say
that many hardworking students and families feel a strong obligation to
pursue whatever opportunities are available to make that investment in
a college education.
I strongly support your efforts to protect students and fight this
fraud. S. 1455, the College Scholarship Fraud Prevention Act of 1999,
sponsored by Senator Abraham and Senator Feingold, will help reduce the
prevalence of these types of crimes.
The bill's first plank, which toughens the penalties against the
perpetrators of such fraudulent services, will send the message that
such behavior will not be tolerated. The second plank removes the
protective shield of bankruptcy that many financial assistance services
hide behind when prosecuted. Finally, putting a list of reputable
services online will provide parents and students with the best defense
there is: good information.
I would like to offer two suggestions as to how S. 1455 can be made
even stronger:
Require the Department of Education to submit an annual report to
Congress on fraudulent financial assistance services.--By doing so,
Congress will ensure that the issue retains high visibility. Such a
report should include a list of companies that have been investigated
or have had complaints filed against them. It should also categorize
the different kinds of fraudulent services that are prevalent. By
issuing such a report, the Department of Education would raise the
issue's profile in the education community. In addition, it is likely
that such a report would be covered by a broad spectrum of media as
well. Increased awareness of the problem would ultimately benefit
students and their parents.
Promote a coordinated effort between the Department of Education
and the Federal Trade Commission to educate high school students and
guidance counselors on scholarship fraud.--As mentioned above, good
information is often the best defense against fraud. Providing guidance
counselors and high school seniors with tips for avoiding potentially
fraudulent financial assistance services would go a long way towards
reducing the prevalence of these crimes. Whether through printed
materials or otherwise, this would supplement the information that this
legislation already seeks to place on the World Wide Web.
The College Scholarship Fraud Prevention Act of 1999 will help
protect many students and parents from the predatory practices of
fraudulent college financial assistance services. Providing an annual
report on the subject and educating high school students and guidance
counselors would offer even greater protection to potential victims.
Thank you for this opportunity to testify.
Senator Abraham. As I said, we will now turn to Senator
Feingold for his statement.
STATEMENT OF HON. RUSSELL D. FEINGOLD, A U.S. SENATOR FROM THE
STATE OF WISCONSIN
Senator Feingold. I would like to thank you, Senator
Abraham, for your efforts to protect our Nation's students from
scholarship fraud. This is not the first Abraham-Feingold
effort and the last one was a very successful one and a good
one, and I appreciate your asking me to work with you on this.
Senator Abraham. Thank you.
Senator Feingold. I would also like to thank the chairman
for holding the hearing.
My home State of Wisconsin, like its Midwestern neighbor,
Michigan, is fortunate to have some of the finest higher
education institutions in the entire United States, and good
football teams. Although we did not quite beat Michigan, I
think we can both agree that Wisconsin's defeat of Ohio State
last week was a pleasure for both of us.
Senator Abraham. It served a useful purpose.
Senator Feingold. But in all seriousness, we are extremely
proud in both of our States of our schools, our higher
education institutions. Our States also enjoy diverse higher
education systems, including public colleges and universities,
community and technical colleges, and independent colleges and
universities.
High school students across the United States spend a good
portion of their junior and senior years dreaming of attending
one of these fine institutions. I think I am on the phone with
my daughter, if not with her in person, every other day talking
about this. She is a junior in high school right now.
They recognize that a college education is an invaluable
asset and higher education a truly wonderful experience.
Students and parents alike are facing the reality that a
college education is becoming increasingly expensive. And as I
have indicated, I have personal experience with that, with one
daughter already enrolled in the University of Wisconsin system
and another one getting ready to apply.
A university education is significantly more expensive than
the costs I faced when I attended the University of Wisconsin-
Madison. The University of Wisconsin-Madison is quite
affordable compared to other Big 10 universities, but the costs
are increasing, and students in my State are concerned about
those costs.
Fortunately, there are some private and Federal scholarship
opportunities that help to allow students to realize their
dream of a college education, but these resources are limited
and there are not nearly enough for all of those in need.
Regrettably, some unscrupulous companies are trying to take
advantage of students by imitating legitimate government
agencies and grant-giving foundations, and I am dismayed by the
increasing frequency with which I hear stories of corrupt
companies and individuals preying on the hopes and dreams of
America's youth.
Many of these unscrupulous companies guarantee scholarships
in exchange for an advance fee. Some of these companies attempt
to sweeten the deal by providing money-back guarantees which
lures in unsuspecting students. Still others trick students
into divulging their checking account number and debit the
student's account, with or without a student's consent.
In most cases, the result is the same. The students lose
valuable time and resources that could have been used toward
furthering their education. Some students do receive their
money back, but only after countless hours of phone calls and a
few months of worry and hassle.
Sherri Pickett, a senior at the University of Wisconsin-
Madison, paid $45 to a firm called Academic Financial Programs.
A month later, she received a folder containing 10 grant and
scholarship opportunities. That is when the problem started.
First, she noticed that she, as a junior, was ineligible for
seven out of the 10 scholarships. Then she wondered why she
filled out the personal profile. Sherri received a few notices
for freshman scholarships when she was a junior, notices for
aid available only to those going into the petroleum industry,
and notices for financial aid for students at private
institutions.
Finally, she realized that the acceptance deadline had
already passed for the three remaining scholarships. Sherri
spent countless hours trying to reach Academic Financial
Programs. In the meantime, she contacted each of these
scholarship opportunities and hoped to get a formal letter of
rejection so she could simply get her money back. Instead of
spending her time chasing scholarships she wasn't qualified for
and leaving countless messages on answering machines, she could
have devoted her time to studying, working, or enjoying
college.
In the end, Sherri did receive her money back, but only
after many hours of hassle. But Sherri makes an important
point. She writes, ``They will return your money if you have
months of time to devote to them, but my money was something I
already had in the first place.''
We need to help students like Sherri Pickett who lost
valuable time and confidence in the system trying to reclaim
her fee from a corrupt company. Mr. Chairman, I ask that her
full story be placed in the record.
Senator Abraham. Without objection.
[The prepared statement of Ms. Pickett follows:]
Prepared Statement of Sherri Pickett, Senior at the University of
Wisconsin-Madison
My name is Sherri Pickett and I am from Madison, Wisconsin and am a
senior at the University of Wisconsin-Madison. In June of 1998, I was
contacted by a financial assistance service named Academic Financial
Programs. The letter describing their service stated that if I sent the
company a fee of $45, they would identify for me sources of financial
aid for the upcoming school year. If they could not find identify any
financial aid, I would be reimbursed for the fee. I felt I could not
lose. I needed the money badly for school and I thought if there were
any problems with the process, I would get my money back. I sent in the
money along with a personal profile of myself, which included my major
in school and my career interests. This was apparently the criterion
that was used in order to locate the appropriate scholarships and
grants.
About a month later, I received a folder of about ten grant and
scholarship opportunities. I also received information about how to get
my money back if none of the identified sources could provide financial
aid for me. I was anxious to contact these sources because I was
excited at the opportunity to receive any extra aid. I became skeptical
as I looked closer at all of the sources. I noticed that I was not even
eligible for about seven of them. I wondered what the personal profile
was for if I did not match any of the requirements. I received a few
notices for freshman scholarships when I was a junior, notices for aid
available if you were going into the petroleum industry, and notices
for financial aid for students at private institutions. I never wrote
anything of the sort in my personal profile. I also received notices
for aid that was no longer available because the deadlines had all
ready passed. Academic Financial Program also sent me information on
aid from the state of Wisconsin, which I would have already received in
my financial aid package from the university if I were eligible.
At this point, I was determined to get my money back because I
could see the program was nothing like I expected. It was now my
responsibility to write to all of these sources and get rejection
letters. The Academic Financial Program wanted you to write to the
identified sources asking about financial aid in general. Instead, I
told each source up front in letters that I knew I was not eligible for
their financial aid and I wanted a letter from them stating so in
return. The few scholarships I was eligible for were already past the
acceptance deadline.
I was so frustrated with this program that I called their office in
San Diego several times telling them to expect my demand for a refund
in the mail. About half of the times that I tried to contact them, no
one would answer their phone. This was really starting to scare me
because I really hated to think that I was being scammed. I finally got
a hold of someone in the office and expressed my concerns about what I
received from them. The woman I spoke to seemed helpful, but I was not
sure how genuine she was. I thought they picked up their phone by
mistake and would not pick it up again after speaking with me.
I started to panic and contacted my financial aid advisor. She told
me that plenty of students were paying far more than I was and not
being reimbursed by these types of companies. She said she wished I had
talked to her before I decided to follow through with paying Academic
Financial Programs. I told her how disappointed I was with the service.
I could not believe that these people actually have access to your name
and information to contact you. It was definitely not what I expected.
I spent several weeks gathering all of the rejection letters in hopes
that I might possibly get my money back. It was very irritating that I
had to even bother with the sources I was not eligible for.
In between the time that I sent all of this information back to San
Diego and the time that I actually heard back from them, I was
constantly calling them to see if they received the package yet. I
finally received the reimbursement in the mail of the full $45 after
the course of a couple months. I was very fortunate to see that money
back. I thought that I was probably just one out of the many people who
even bothered going through the hassle of getting their money back with
this company. Most students probably did not see the trouble they were
getting themselves into, they just saw the potential money like I did.
Although I got my money back as promised, it was a very long and drawn
out process. I have warned many people about the program to hopefully
save them the time and aggravated feeling I had after dealing with
Academic Financial Programs. There is no question that they do not
deliver what they promise--links to financial aid sources. They will
return your money if you have months of time to devote to them, but my
money was something I already had in the first place.
I urge this committee to pass S. 1455, which would prevent future
students from going through the ordeal that I dealt with.
Senator Feingold. Hopefully, with this legislation, we can
empower the Justice Department, the Federal Trade Commission,
and the Department of Education to prevent companies from
scamming students like Sherri.
I commend the FTC for addressing the issue of scholarship
scams. In 1996, the FTC initiated Project Scholarshipscam, a
nationwide crackdown on fraudulent scholarship search services.
I am particularly pleased about the accessibility of
information on scholarship scams on the FTC's Web site and look
forward to hearing from the FTC on its efforts to deal with
this problem.
Private organizations have also joined in the effort. Web
sites such as www.finaid.org provide a valuable service, both
making students aware of legitimate scholarships and warning
them of potential scams. I am pleased that Mr. Kantrowitz has
joined us today. Unfortunately, their efforts are not enough to
deter scholarship scam artists. According to the National
Association of Student Financial Aid Administrators, more than
350,000 people are duped by aid scams each year, losing some $5
million annually.
I understand that in one such case, in Baltimore, MD, a
single individual defrauded 60,000 students for a grand total
of $600,000. This fraud must stop. Students have a right to
dream of a college education without worrying about fraud and
abuse. We must increase awareness of such fraud, protect
students from scam artists, and deter future criminals.
I am pleased that this legislation will protect students by
requiring the Department of Education to create a Web site of
legitimate sources of scholarship information. It would further
require the Department of Education to coordinate with the FTC
in compiling this list. This legislation will protect against
fraudulent organizations being listed on the site. The Web site
will hit the ground running, since the FTC has already begun
the awareness campaign on their site. This Web site will
provide an invaluable service, making students aware of
legitimate scholarships and helping them to differentiate
legitimate companies from con artists.
I am also pleased that this legislation improves the FTC's
ability to recover the monies owed students. I understand that
some scholarship scam artists use bankruptcy to retain their
ill-gotten gains and avoid paying court judgments. Here is how
they do it. First, the scam artists use the student's money to
invest in expensive homes. When the scam artists are hit with
disgorgement and redress orders, they file for bankruptcy. The
scam artists take advantage of the bankruptcy estate exemption
for residential property to keep the students' money. Then
after the bankruptcy proceedings clear their debts, the scam
artists sell their expensive homes and succeed in keeping the
money they have defrauded from students. This is an outrageous
abuse of the bankruptcy laws and can't be allowed to continue.
While I am cautious about eliminating legitimate exemptions
from bankruptcy for those who need them, I want to be sure the
scam artists cannot use bankruptcy as a tool to avoid being
held responsible for their wrongdoing.
The scams themselves take many forms--the advance fee loan,
the scholarship prize, the guaranteed scholarship search
service, to name just a few. Unfortunately, all the scams have
one common thread; they deprive students of resources that
could otherwise be used for books or tuition.
In one scam that has been cited by Senator Abraham and
others, a bogus organization, the National Scholarship
Foundation, charged students a $189 processing fee. For their
hard-earned dollars, students received only general information
about the general college application process. For those who
may be reluctant to act on this legislation, I want to make
clear that these frauds, though they may seem like small
amounts of money, represent real money to Wisconsin students.
For $189, students could have taken a sales management course
at the Milwaukee area technical college, bought books at the
campus bookstore in Madison, WI, or purchased 10 to 15 hours of
child care to allow them to be able to attend classes in the UW
system.
We in Congress also believe these amounts to be
significant. For example, the fiscal year 2000 Labor-HHS bill
contained a $200 increase in the maximum Pell Grant award. We
would like to do more, but that is supposedly worthwhile, that
is real money.
I hope this committee will take up this legislation soon
and forward it on to the full Senate. We need to protect our
Nation's college students from unscrupulous companies. This
legislation is a common-sense first step in preventing
scholarship fraud, and I again want to thank Senator Abraham
for his leadership on the issue.
Thanks for the time.
Senator Abraham. Senator Feingold, thank you. I think you
have once again identified some compelling arguments in support
of what we are trying to do here, and I appreciate your help on
this very much.
Senator Feingold. Mr. Chairman, I forgot to ask unanimous
consent that Senator Leahy's statement be submitted for the
record.
Senator Abraham. Of course, without objection.
Senator Feingold. Thank you.
Senator Abraham. If other members of the full committee
wish to submit statements, we will leave the record open for
them to have that opportunity.
[The prepared statements of Senators Hatch and Leahy
follow:]
Prepared Statement of Hon. Orrin G. Hatch, U.S. Senator From the
State of Utah
Good morning, and welcome to today's hearing on solving the problem
of scholarship scams. I first would like to thank Senators Abraham and
Feingold for their efforts and leadership on this important issue. As
many of you know, ``The Scholarship Fraud Prevention Act (S. 1455)''
was introduced by Senators Abraham and Feingold on July, 28 of this
year. Also, I would like to thank all of our witnesses today for their
time and cooperation.
For those of us who care deeply about education and who promote
higher education, scholarship scams are particularly offensive because
they target the very students who are in need of financial help to
continue their education. I have a long record of supporting the
integrity of the student loan system, and ensuring that students have
the broadest possible set of options in financing their educations. I
am a longstanding supporter of the student loan system, and have worked
hard to make sure that interest rates on student loans are kept to a
minimum. I also have undertaken to make sure that scholarships and
grants remain available to assist those students who need them.
It is well-known that the cost of a college education today is
extremely high, and students increasingly must seek financial
assistance in order to attend. At the same time, fraud in the offering
of financial assistance to college students has emerged in a wide
variety of forms, and appears to be a growing problem. I hope that,
with this hearing, we will better understand the problem of con artists
who defraud students seeking to finance their college educations, and
examine appropriate solutions to the problem.
__________
Prepared Statement of Hon. Patrick J. Leahy, U.S. Senator From the
State of Vermont
One of the singular most important issues facing us today is
education. Affordable higher education is an opportunity that must be
made available to all of our young people. To that end, public and
private scholarships, grants and loans have long assisted our nation's
students in pursuing college degrees.
Phony scholarship offerings, scams and frauds do great harm to our
nation's students. No student seeking to attend a college or university
should have to worry about whether a scholarship offering is legitimate
or wonder whether the business to which he or she has mailed an
application fee actually exists. I am glad we are exploring ways to add
to the arsenal of our current laws to combat these types of frauds.
The goals of the proposed bill are laudable: combating scholarship
scams and promoting the dissemination of information about legitimate
sources of higher education funding. Nevertheless, I have certain
questions about whether the proposed bill is the most effective way in
which to pursue the goals we all share.
For instance, the bill proposes to raise the long-standing
statutory maximum punishment of five years for mail and wire fraud to
ten years in cases of scholarship scams. In light of the fact that
scholarship scams often involve more than one victim and may result in
multiple charges, raising, the statutory penalties may not be necessary
to effectuate punishment goals. A more appropriate and effective
solution to ensure adequate punishment may be to direct the Sentencing
Commission to consider whether a guideline enhancement for cases
involving fraudulent scholarship offerings should be added to the
Sentencing Guidelines. I would welcome consideration of this issue.
Similarly, I would be interested to know whether we have
information to suggest that those criminals who base their schemes on
scholarship offerings are more likely than those perpetrating other
types of frauds to shield ill-gotten gains in bankruptcy homestead
exemptions. I would welcome further information on this issue as well.
I look forward to reviewing the testimony of our witnesses and
learning more about these important issues.
Senator Abraham. I just have a few questions, and really
they are in part just to follow up on some of the points
already made. First, I am going to ask Ms. O'Flaherty,
obviously your office is the center of this activity when it
comes to identifying and assisting students with respect to
financial assistance. I assume you also have a relationship
with high schools in our State that come to you for information
or that you provide.
Having now been part of this process, seeing some of these
fraud schemes, and so on, is it your impression--at least the
ones who actually charge people to just provide information,
that essentially the information that they are providing when
it is simply of that sort is available to students either at a
financial aid office like yours or often even in their own high
school?
I don't want to presume that, but is that typically the
case? I mean, is there any unique information that these
services--I guess that is how I should ask the question--that
these services have that couldn't be obtained at the Western
Michigan University financial aid office?
Ms. O'Flaherty. I would say there is very little. On a
service that is legitimate, there may be some scholarship match
that we have been unable to do. The State of Michigan has an
excellent scholarship match on its Web site for free; it is a
national database.
Very, very often, the parents that I speak to who are so
frustrated and have that horrible sense of being taken, they
come in and it says Federal direct unsubsidized loan and parent
loan, and we see a lot of that. So, yes, that information is
available in our office, in most financial aid offices, and on
numerous Web sites for free.
Senator Abraham. So the notion that somebody has to pay,
whether it is $189 or it is $20, to get this so-called inside
information about scholarships that are out in the world--
basically, that isn't the case. This kind of information is
available at the place you would probably typically think of to
begin with.
Ms. O'Flaherty. Correct, it is, and if it is not right
there, we can get them to the right resource on the Web.
Senator Abraham. You indicate in your testimony that as you
have traveled around to do maybe seminars or whatever that you
are hearing more and more of these kinds of problems. Has that
been the case with the students who come into the financial aid
office itself?
Ms. O'Flaherty. Yes. I mean, I have been in financial aid
since 1973 and this has been an issue my whole term. I have
always heard about it on and off over the years. I just
returned from a financial aid conference in Cleveland last
night, and intentionally talked to as many people from various
States as I could to find out their sense of what was going on.
And I would say for the most part, the sense is that it
continues, it is growing, it is changing its face all the time;
a little bit different twist associated with purchasing
something. Insurance policies, any variety of things are
associated with it, so we feel very strongly that it is out
there in significant amounts.
Senator Abraham. So whatever we are trying to do or is
currently being done that might be discouraging hasn't seemed
to work, and therefore you would conclude that we need to do
more in terms of the discouragement of this kind of practice, I
guess.
Ms. O'Flaherty. Yes, I would, and I really mean it when I
say I have talked to parents, not even at college nights but
just in the office or informally. It is a huge issue and a
question for many, many families.
Senator Abraham. My sense--and, again, I don't have any
empirical evidence to back this up, but maybe Mr. Kantrowitz
would have some insight. But my sense is that as we develop new
technologies, we, of course, give creative people who want to
use new technologies in a bad way new opportunities.
And my suspicion is that some of the reason that this is
growing is because with the Internet now there is a lot of new
sort tools, so to speak, available to people to communicate
with students, and maybe even in a more effective way to some
extent because there might be a little more--I don't know--a
mass mailing may just on its face be easy to look at and
discard, whereas something that maybe shows up through the
Internet sometimes might have an even more serious look to it
or be harder to discern immediately if it was not effective. Do
you think that is a possibility?
Mr. Kantrowitz. Definitely a possibility. The Internet is a
new communication channel and just as it can be used by
legitimate organizations to communicate at less expense, it can
also be used by scam operations to reach a greater audience.
Senator Abraham. I want to change gears slightly and go to
you, Ms. Anthony. First of all, we appreciate what the FTC has
done both working with our office as we have put the
legislation together and even before that when we first started
reading about these problems and hearing from people in
Michigan. You have been very helpful to give us the kind of
background needed to both go out on a little tour of my own to
talk about these warning signals, but also in terms of helping
us to do a better job here.
One of the questions I have is right now the issue, I
guess, is in my mind is with respect to the pursuit of those
who are engaging in this fraud. Your power is obviously limited
to sort of civil actions, not to criminal actions.
Ms. Anthony. That is correct.
Senator Abraham. At this point, is it typical for the FTC
to then make criminal referrals to the Department of Justice?
Is that what would happen if you thought somebody had reached a
level of misconduct that required that criminal fraud was
involved? Is that how the process works?
Ms. Anthony. Yes. We have two options. We can either bring
a civil action or make a criminal referral to a U.S. attorney's
office, which we have done.
Senator Abraham. Do you do that very often at this point,
or is that sort of a limited use option?
Ms. Anthony. It depends, I suspect--I would like to defer
to the staff on this and I will get back to you with that
question.
Senator Abraham. That would be fine.
Ms. Anthony. But it would depend, I suspect, on maybe the
size of the consumer injury as to whether the U.S. attorney's
office, who are dealing with drugs and violent crime and other
matters, would feel that it was worth the resources that they
would need to expend.
Senator Abraham. I would be at least interested in knowing
how that process has worked, and also to the extent you know,
what follow-up or what percentage of the referrals have
actually been acted on. I am sure the calculus from the other
side--that is, from the U.S. attorney's side or from the
Department of Justice's side--also is to look at the penalties
that currently exist which are not very severe in terms of the
criminal side and maybe when they have to make that cost/
benefit analysis between pursuit of other criminals or
prosecutions versus these.
One of the arguments we have for our legislation is that by
increasing the potential criminal penalties, it not only maybe
discourages people, but it also makes the pursuit of cases in
this area a little more arguable, or sort of buttresses the
investments that would be made in terms of resources. So if you
could get us some information along those lines, that would be
very helpful.
Ms. Anthony. I will be happy to do that, Senator.
Senator Abraham. And we do thank you for the FTC, the full
agency, your Commission, for what efforts you have already
engaged in.
Do you feel that it would be possible to work with the
Department of Education to put together the kind of site that
we have talked about that might give students at least a more
accurate list of the services that are legitimate?
Ms. Anthony. We would feel delighted to cooperate with the
Department of Education in any way that we could be of
assistance. We have made great efforts to send a consumer
education message, and we feel that we have been fairly
successful with that, to both businesses and individual
consumers.
We would be, of course, deferring to the Department of
Education, who has a great deal of experience in all sorts of
financial aid, both loans and work/study and other financial
aid packages. But as far as helping them with lists, we would
be happy to lend a hand.
Senator Abraham. And Mr. Kantrowitz has given us some ideas
as to other ways that we might want to adjust perhaps the
process, or at least the sort of criteria, and we will look
into those.
Mr. Bery, your personal experience is probably the most
illuminating sort of testimony we have received in a certain
sense because it demonstrates that this isn't just kind of an
imagined problem, but one that hits home to people of modest
means and causes hardship.
I think one of the problems, as I have sort of talked to
people in our State, is that the amount of injury suffered in
terms of dollar damages to any one person is at a level where
the pursuit of any kind of redress is to them, at least, more
expensive, presumably, or more difficult than the loss
involved.
We have also noticed in Michigan, at least, that the people
who have--you know, the law enforcement folks in our State and
the people in the universities and colleges are having a
greater difficulty because many times the people involved are
not around Michigan. They are from Maryland or they are from
other parts of the country, which is another reason why I think
having some sort of Federal comprehensive approach makes some
sense.
But I am just wondering, in your professional role now, are
you too encountering an indication of an increased level of
this sort of activity going on? Is that something in your job
with PIRG that you are encountering?
Mr. Bery. Well, as you have said, a lot of times because
students at an individual--you know, it is so daunting to even
begin to figure out the process of what to do once you have
lost anything from $25 to $200. A lot of times, the types of
complaints that could be logged aren't because students are
just dismayed by that and move on to other efforts.
But I think this effort, this bill, will go a long way
toward sending out a message nationwide to perpetrators of
these types of crimes that there are significant penalties. And
it is also good because it provides good information through
the requirement of a Web site. And I think even further
developing that and further developing the efforts that
Commissioner Anthony had mentioned with regard to the FTC
providing those bookmarks at college bookstores--maybe if the
Department of Education and the FTC aren't already doing this,
going so far as to provide information to guidance counselors
at the high school level, so a high school senior who walks
into a guidance counselor's office and sees a pamphlet next to
the FAFSA, the Free Application for Federal Student Aid, that
says don't get scammed, and a few tips, similar to what the
poster was that the Commissioner had highlighted for the
hearing. Those would be good steps to avoid that.
Senator Abraham. I think some of that does go on, right?
Ms. Anthony. Yes, it does, and the testing services have
been cooperative with us in disseminating these sorts of
warnings to high schools and high school guidance counselors.
Senator Abraham. Senator Feingold.
Senator Feingold. Thank you, Mr. Chairman, and thank you to
all the witnesses for being here. I just have two questions for
Commissioner Anthony. I have been particularly concerned about
the availability of financial aid to low- and middle-income
students, many of whom have contacted me about the Pell Grants.
Ms. O'Flaherty indicated in her testimony that many of the
victims of the scholarship scams are students in low- and
middle-income households.
Do you find any evidence that these scams are, in effect,
profiling students and specifically targeting certain economic
groups?
Ms. Anthony. Senator, I think these scam artists are
targeting all American families who have college-age students,
and I don't necessarily think it depends on the income level
because nearly every family today is seeking financial aid in
some way or another because college costs have become so
expensive. If we do discover any matter of profiling, I will be
certainly happy to share that information with you.
Senator Feingold. Fair enough. The other question is if you
could discuss the extent of the problem with scam artists
hiding their ill-gotten gains under the residential property
exemption for estates in bankruptcy proceedings. In your
experience, have you found that scam artists are hiding their
ill-gotten gains from bankruptcy courts in other ways, in
addition to the residential property exemption?
Ms. Anthony. I am not aware of any. I will be happy to
consult with the staff and get back to you on that.
Senator Feingold. Thank you, Commissioner. Thank you, Mr.
Chairman.
Senator Abraham. Senator Feingold, thank you.
As we bring this to an end, oftentimes our hearings are--
because a member has a different view on the issue from our
committee, they bring in witnesses who are in conflict. Today,
we don't have much conflict, so our hearing is relatively short
in length, but not limited in terms of its impact. I think it
can be very helpful to us as we try to move the bill forward.
Before we close, I have been actually handed a statement
which we will include in the record, assuming there is no
objection, from Assistant U.S. Attorney Dale Kelberman, from
the District of Maryland, who is the supervisor of the White
Collar Crime Section and who dealt with one of these cases, the
one I referenced in my opening statement. He would like to have
this statement entered into the record as well.
[The prepared statement of Mr. Kelberman follows:]
Prepared Statement of Assistant U.S. Attorney Dale P. Kelberman
Mr. Chairman and Distinguished Members of the Senate Judiciary
Committee. Thank you for the opportunity to present this statement to
the Committee regarding the prosecution by our office of the case of
United States v. Christopher Ebero Nwaigwe aka Christopher Maige
(Criminal No. WMN-98-0414, D.Md.). I am an Assistant United States
Attorney for the District of Maryland and the supervisor of the White
Collar Crime section of the Office. I have been an Assistant since
October, 1987, and have been a prosecutor for approximately twenty-five
years at the federal, state and local levels. The Nwaigwe case was
prosecuted by an Assistant United States Attorney who comes under my
supervision in the office.
Our office worked with agents from the United States Postal
Inspection Service in conducting the investigation which led to the
charges against Mr. Nwaigwe. The investigation focused upon Mr.
Nwaigwe's false representations to various members of the public in
which he represented that he was associated with different college
scholarship programs including the ``National Health Scholarship
Program,'' the ``National Nursing Scholarship Program,'' the ``Higher
Education Scholarship Program,'' and other similarly-named programs.
Using both his own name and an alias, Christopher Maige, Mr. Nwaigwe
had opened about a dozen post office boxes in various locations in the
Baltimore metropolitan area. The post office boxes were represented to
students and prospective students as ``suites,'' when they were simply
mail drops. Nwaigwe mailed letters to students from lists he had
obtained advising them that they had won scholarships, or could win
scholarships. The solicitation requested that the students fill out
forms and send them in with a $10.00 processing fee to one of the named
addresses. In truth, there were no scholarships for any student.
The $10 fee was deposited to bank accounts Nwaigwe opened at Signet
Bank, First National Bank of Maryland, and NationsBank. Nwaigwe used
the funds for his own personal use, although it was difficult to trace
all the funds because much of it was converted to cash. Nwaigwe
collected approximately $500,000 from prospective students in this
fashion.\1\ Mr. Nwaigwe had previously been the subject of a cease and
desist order from the Postal Service, which order had been issued in
1993. Nwaigwe also was enjoined from soliciting fees in 1996 in a civil
action. On October 22, 1998, Mr. Nwaigwe was indicted by a grand jury
in the District of Maryland on seven counts, each of which charged him
with the crime of mail fraud, in violation of Title 18, United States
Code, Section 1341.
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\1\ One of the delays in prosecuting this case was the time
involved in obtaining all the necessary bank records relevant to the
government's case. In order to identify all possible victims, the
government issued subpoenas to the three banks for all deposited items
of $10.00 or more. Given the volume of activity into those bank
accounts, it took the banks some time to research and copy all of the
thousands of bank items involved.
---------------------------------------------------------------------------
Nwaigwe was represented by the Federal Defender's Office in the
District of Maryland, and went to trial on March 8, 1999 before a jury
presided over by the Honorable William M. Nickerson. The defendant was
convicted of all seven counts by the jury on March 15, 1999.
The trial court ordered a presentence report, and held sentencing
on June 4, 1999. Because he was convicted of seven counts of mail
fraud, Mr. Nwaigwe was subject to a maximum statutory penalty of
thirty-five (35) years imprisonment, a fine of $1,750,000 (7
$250,000), supervised release, restitution of the amount of the loss,
i.e. $500,000, and a special assessment of $350.00 (7
$50.00).
However, because the Sentencing Reform Act of 1994, which adopted
the federal sentencing guidelines, applied, Mr. Nwaigwe's sentence was
based upon the sentencing guideline factors which applied to his case,
as adjusted based upon his criminal history. In addition to the ``base
offense level,'' the sentencing guideline factors found to apply by the
trial judge included: (1) the amount of the loss ($500,000); (2) a two-
level enhancement because there was more than one victim; and (3) a
two-level enhancement because the defendant falsely represented that he
was acting on behalf of an educational organization and had violated an
administrative order. As a result of these factors, the sentencing
court found the guideline range to be 33 to 41 months incarceration.
The trial judge departed downward one level from that range because
Nwaigwe's status as an ``alien'' might subject him to more onerous
conditions of confinement. The judge imposed a sentence of (36) months
incarceration, followed by three (3) years of supervised release. The
court determined that Nwaigwe did not have the ability to pay a fine or
make restitution, so none was ordered. Mr. Nwaigwe was detained in
Worcester, Massachusetts shortly after his indictment, and he has
remained in custody since then.
Mr. Nwaigwe has filed a notice of appeal to the United States Court
of Appeals for the Fourth Circuit, which is pending. The defendant has
not yet filed his brief in the 4th Circuit, so the issues on appeal are
at this point unclear.
Senator Abraham. So I want to thank the panel, thank the
organizations represented as well. And certainly to our
audience, I appreciate those who have spent a little time with
us today. We will work together certainly with our colleagues
here on the committee to try to move this legislation. I think
it is a constructive step. Hopefully, it can begin the process
of reducing the abuse that has gone on. And we appreciate those
of you on the front line and the job you are doing to try to
help with that as well.
So we will bring the hearing to a conclusion and we thank
everybody for their participation.
[Whereupon, at 3:26 p.m., the subcommittee was adjourned.]
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