EDITED TO ADD: I've since found out that full-size folders will go through. You don't have to cut them down. My only recommendation would be to avoid the folders with the metal clasps in the center. Stick to simple paper folders.
Someone on the "Letter Writing Ideas" page over at the Compassion Blog came up with a GREAT idea!! (Hi Donna!) :) Send a folder to your child so he or she has something to keep letters and gifts in.
The standard-size folder exceeds Compassion's size limit. One idea is to cut the folders down to size. Cut an inch or two off the top and an inch or two off the right hand side. Then staple the pockets closed again.
This is what we did for one of my daughter's art projects and they are really sweet. See pics above!