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How to Investigate Suspicious Offers


These tips and tools will help you combat scholarship scams.

Tools for Investigating Corporations

If an organization claims to be incorporated - by including "Inc.", "Incorporated", "Corporation", or "LLC" as part of their name, or otherwise identifying themselves as a corporation - their articles of incorporation must be on file with the Office of the State Attorney General or the Office of the Secretary of State. Even if the company is incorporated in another state, they must be registered as an alien or foreign corporation in order to do business in your state. Many states require corporations to file a copy of their annual report as well. If you discover that a corporation isn't really incorporated, that would suggest that it is a scam trying to pass itself off as a legitimate business.

To find out whether an organization is incorporated, call the state's corporation bureau. They can verify the status of a corporation and provide basic information about the organization, such as its date of incorporation, the corporate address, whether it is incorporated as a for-profit or non-profit corporation, the names of the directors or other principals of the corporation and the name and address of the corporation's registered agent.

A few states have established web sites for the office of the attorney general. These include: Florida (see also their Corporations Online database), Delaware, Indiana, Massachusetts, Missouri, Minnesota, New Jersey, New York, Ohio, South Dakota, Texas and Utah.

You can also search newspaper full text databases for newspaper references to the company or individual. Useful databases include LEXIS/NEXIS, DataTimes (Dow Jones News/Retrieval), Newsbank, DIALOG and Northern Light Search. Searching these databases usually costs money, however. But some of the databases will display a short excerpt or a list of matching articles for free. It is also helpful to search the web for the organization. The web search engines now check whether the organization has a web site and will provide wire service articles about the organization.

Tools for Investigating Nonprofit Organizations

Foundations and non-profit organizations must register with the state Attorney General's Office or the Office of the Secretary of State. Many states have a separate State Registry of Charitable Trusts for this purpose.

Most states have laws that prohibit companies from using a business name that falsely gives the impression that the company is a government agency, foundation, or public benefit corporation. Although these laws aren't enforced very well, if a company uses the words "Fund" or "Foundation" in its name but is not a foundation, be careful.

Shocking as it may seem, just because an organization is a nonprofit corporation doesn't mean it isn't a scam. All nonprofit status really means is that the corporation does not have shareholders and retains all of its "profits"; it does not mean that it is a charitable organization. Nonprofit corporations are not required to have 501(c)3 tax exempt status. Nothing prevents a nonprofit organization from paying exorbitant salaries to its employees or from providing generous employee benefits.

Your local public library may have a copy of the Directory of Nonprofit Organizations, the Encyclopedia of Associations and the Foundation Center's Foundation Directory and Foundation Grants to Individuals. If the organization is not listed in these directories, be suspicious.

Tools for Investigating Tax-Exempt Organizations

IRS Publication 78 lists all tax-exempt charitable organizations. If an organization charges an application fee for a scholarship but is not listed in IRS Publication 78, chances are it is a scam. (When searching for an organization, it is best to provide the city and state and to avoid keywords like "foundation" which are very common.)

Note that tax-exempt status is not a guarantee than an organization is legitimate. For example, although 501(c)3 organizations must be "organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or education purposes", the US Supreme Court has ruled that state laws cannot mandate such organizations to devote any specific percentage of their revenues to their charitable programs. Of course, if the IRS suspects that a 501(c)3 organization is engaging in tax fraud or is set up to enrich its members, it can audit the organization and revoke its tax exempt status. But it takes the IRS as much as 24 months to review an organization's tax exempt status, long enough for a fly-by-night organization to close up shop and disappear. So such status is suggestive of legitimacy, but no guarantee.

IRS Form 990

The state registry of charitable trusts should have a copy of the organization's annual information return (IRS Form 990-PF for private foundations or IRS Form 990 for nonprofit organizations), which contains information about the amount of money they give away each year. If the amount of money they take in from application fees exceeds the amount of money they give away in scholarships, students aren't being well-served by the organization. Try calling the Attorney General's Office (you may need to ask for the Office of Charitable Registrations) and ask if they have an IRS Form 990 on file for the organization.

The IRS Form 990 for an organization is extremely useful in evaluating the operation of the organization and can tell you whether it truly operates in the public interest. However, reporting abuses do occur, so the information on the IRS Form 990 is not guaranteed to be accurate.

501(c)3 organizations with total assets over $250,000 file an IRS Form 990 (information tax return). Those with assets under $250,000 and annual gross revenue under $100,000 file IRS Form 990-EZ. These forms are filed with the Attorney General's office of the state of incorporation and the state(s) in which the organization operates. Charities classified as private foundations (an organization that receives most of its money from investments) file IRS Form 990-PF. Charities with an annual gross revenue of under $25,000 are not required to file an informational return with the Attorney General's office.

IRS Form 990s may be viewed at the nonprofit organization's principal office and at the Attorney General's office (usually in a Registry of Charitable Trusts). It can also be obtained by calling the IRS General Disclosure Officer at the local IRS District Office. To request a copy of a Form 990 from the IRS, file IRS Form 4506.

When evaluating a nonprofit organization, one must look at several factors. How much of its budget is spent on fundraising and how much on salaries? If this figure is too high, the nonprofit could simply be funneling money to the people who created it. Fundraising expenses should never exceed 25% of the annual budget. Likewise, examine carefully how much is spent on general expenses. At least 50% of the annual budget should be spent on program activities.

Also consider the organization's total assets, in comparison with the total grants and other spending. Private foundations are required to give away 5% of their assets every year. Charitable organizations are generally expected to spend half their assets every year.

Key items of the IRS Form 990:

Sources of Income Part I, Lines 1-12 Public Donations Line 1a Government Grants Line 1c Total Revenue Line 12 Expenses Part I, Lines 13-17 Program Services Line 13 Management/General Line 14 Fundraising Line 15 Payment to Affiliates Line 16 Expense Details Part II, Lines 22-44 Officers & Directors Line 25 Accountants Line 31 Lawyers Line 32 Travel Line 39 Conferences/Meetings Line 40 Compensation to Individual Officers, Directors and Trustees can be found in Part V.

How to Identify Mail Drops

Many scams operate out of a residence or use a mail drop as a return address. Scam artists prefer mailboxes at packaging and shipping companies because US Postal Service regulations require the post office to disclose the name and address of the person who rented the box. In contrast, outfits like Mail Boxes Etc. have privacy policies that prohibit the disclosure of this information to private individuals. They will, however, disclose it to law enforcement agencies.

One method of discovering whether an address is a mail drop is to use a reverse telephone index or a CD-ROM telephone directory with reverse indexing capabilities such as PhoneDisc. The reference desk of the local public library in the city in question will have copies of such "criss-cross" directories. In Chicago, you can simply call the telephone company at 1-312-796-9600 for their reverse directory.

Given a reverse telephone index, you can look for mail box rental companies located at the same address as the organization. Your local public library may have a copy of the Directory of US Mail Drops. FinAid also provides a searchable database of mail drops. Because many mail box rental companies will not confirm that a "suite" is indeed a mail drop, call them and say something like "I can't read my handwriting. Is at box 123 or box 125?" when the organization is actually at box 128. They will correct your "error", thereby confirming that the organization did indeed rent a box.

You can also use a reverse telephone directory to explore relationships between names, addresses and telephone numbers. Sometimes a telephone number will have two listings, one for the "business" and one for a residence.

It is also sometimes helpful to look at a map of the area, to judge the proximity of the address to other locations. Free online map services include Yahoo Maps and MapQuest.

Look for a Directory Listing

The lack of a directory listing for the organization is often a good sign of a scam. You can try dialing 1 followed by the area code and 555-1212 to see if they have a listing. Use 1-800-555-1212 to see if they have a toll free number.

There are also several free directory services available online. Toll free databases include AnyWho Directory Service and Internet 800 Directory. Residential/Business databases include Switchboard Residential/Business Telephone Directory, WhoWhere, BigYellow (NYNEX Business Directory) and BigBook Yellow Pages (USA Business/Residential, with Maps). Yellow Pages (Business Listings) include BellSouth Interactive Yellow Pages (Atlanta only), GTE SuperPages (USA only), World Yellow Pages (USA/Canada Business/Residential) and World Wide Yellow Pages. Other useful directories include

Talk to the Organization

If the organization has published a telephone number in their solicitation, it often helps to call the number. Call first as a gullible clueless student and see what they tell you. Sometimes they will unwittingly reveal information about their organization if you ask the right questions in a non-confrontational manner.

If they want a confirmation number, use the one provided on the postcard received by the student. Often the same number is printed on all the postcards.

Other Resources

The State Consumer Protection Offices can sometimes provide helpful information.

The Federal Trade Commission has published a directory of FTC Regional Offices and federal, state and local consumer protection resources.

If you conduct a Google search for the name of the organization or scholarship and the word 'scam', you may find that other people are also suspicious about the organization.

Try calling the Federal Student Aid Information Center at 1-800-4-FED-AID. They have a list of scams that have been the subject of law enforcement action.

The US Department of Education maintains a searchable list of colleges and universities accredited by federally approved accrediting organizations. Any school that isn't on the list might be a diploma mill. (Note, however, that this list includes only Title IV institutions. Schools that do not participate in the federal student aid program might not appear on the list and yet still be accredited.) The FTC and Office of Personnel Management have published a report on identifying diploma mills, Avoid Fake-Degree Burns by Researching Academic Credentials. The Oregon Student Assistance Commission's Office of Degree Authorization has compiled a list of diploma mills.

The FinAid site also has a directory of Better Business Bureaus, Consumer Organizations, Federal Information Center Telephone Numbers (call to see if an organization is a legitimate federal agency), State Information Offices (call if you need a state government telephone number), State Banking Authorities (call to see if an organization is a legitimate lender) and State Insurance Regulators.

If an organization charges an application fee, it is most likely a scam. If you wish, you can do a more in-depth analysis of their fees.


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