U.S. GOVERNMENT PRINTING OFFICE

70–309 CC WASHINGTON : 2001

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

(

COMMITTEE ON THE JUDICIARY

ORRIN G. HATCH, Utah, Chairman

STROM THURMOND, South Carolina

CHARLES E. GRASSLEY, Iowa

ARLEN SPECTER, Pennsylvania

JON KYL, Arizona

MIKE DEWINE, Ohio

JOHN ASHCROFT, Missouri

SPENCER ABRAHAM, Michigan

JEFF SESSIONS, Alabama

BOB SMITH, New Hampshire

PATRICK J. LEAHY, Vermont

EDWARD M. KENNEDY, Massachusetts

JOSEPH R. BIDEN, JR., Delaware

HERBERT KOHL, Wisconsin

DIANNE FEINSTEIN, California

RUSSELL D. FEINGOLD, Wisconsin

ROBERT G. TORRICELLI, New Jersey

CHARLES E. SCHUMER, New York

MANUS COONEY, Chief Counsel and Staff Director

BRUCE A. COHEN, Minority Chief Counsel

(II)

(III)

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

Page

IV

Responses of Mark Kantrowitz to Questions From Senators

Hatch ................................................................................................................. 52

Thurmond .......................................................................................................... 53

Leahy ................................................................................................................. 54

Various Attachments to the Answers of Mark Kantrowitz .................... 56

(1)

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

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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

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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 introVerDate 11-MAY-2000 11:30 Mar 07, 2001 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 OCT6.TXT SJUD2 PsN: SJUD2
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ducing 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.

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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,

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1This 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. 2 15 U.S.C. § 45(a).

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.

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

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3 15 U.S.C. §§ 45(a), 46(a). 4These include,, for example, the Truth in Lending Act, 15 U.S.C. §§ 1601 et seq., which mandates disclosures of credit terms, and the Fair Credit Billing Act, 15 U.S.C. §§ 1666 et. seq.,

which provides for the correction of billing errors on credit accounts. The Commission also enforces over 30 rules industries and practices.

about such entities.3 The Commission also has responsibility under approximately forty additional statutes governing specific industries and practices.4

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 socalled ‘‘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 schol- arships 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 consum- ers 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

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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 21⁄2

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.

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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

17

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.

18

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.

19

• 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 guaran- tee 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

20

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.

21

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.

22

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

23

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 de- crease 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 suc- cess 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 vari- ations 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.

24

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.

25

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

26

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

27

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

28

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.

29

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 opVerDate 11-MAY-2000 11:30 Mar 07, 2001 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6601 OCT6.TXT SJUD2 PsN: SJUD2
30

portunities. 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

31

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 sev- eral 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 em- power 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

32

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

33

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.

34

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 associVerDate 11-MAY-2000 11:30 Mar 07, 2001 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6601 OCT6.TXT SJUD2 PsN: SJUD2
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ated 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.

36

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 difVerDate 11-MAY-2000 11:30 Mar 07, 2001 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6601 OCT6.TXT SJUD2 PsN: SJUD2
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ficulty 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

38

1One of the delays in prosecuting this case was the time involved in obtaining all the nec- essary 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.

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

39

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.

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 twolevel 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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