Four ways to spot a student loan scam
Student loan forgiveness is a seductive promise for borrowers weighed down by thousands of dollars in debt. But take caution when a website says you can 鈥渉ave your loans discharged,鈥� or when an ad on the radio urges, 鈥淐all us today to qualify for loan forgiveness.鈥�
A growing pack of private companies offers to relieve grads of their student loan debt, when in fact all they do is file paperwork to聽聽borrowers鈥� multiple federal loans into a Direct Consolidation Loan. These companies鈥� tactics are deceptive and costly, officials say, because they鈥檙e charging up to $1,500 for services the U.S. Department of Education offers for free. They work exclusively with federal loans, since private lenders generally don鈥檛 offer flexible repayment plans or loan forgiveness.
And while these companies鈥� marketing materials might say they want to help, their goal is to make a profit, says Robyn Smith, an attorney with the nonprofit legal advocacy group the National Consumer Law Center and a contributor to its 2013聽, 鈥淪earching for Relief: Desperate Borrowers and the Growing Student Loan Debt Relief Industry.鈥�
鈥淭hey aren鈥檛, as they represent, looking at the person鈥檚 factual circumstances and financial circumstances and giving them advice about the best option for them,鈥� Smith says.
It鈥檚 up to you to familiarize yourself with the student loan system so you know where to go for help when you need it, and so you don鈥檛 fall prey to a predatory student loan scheme. Here are five warning signs that the student loan relief you鈥檙e being offered isn鈥檛 what鈥檚 best for you 鈥� and what to do instead of relying on such offers.
Warning sign No. 1: You have to pay to get help
Assistance with your federal loans is always available to you for free through the U.S. Department of Education 鈥� though many borrowers don鈥檛 realize it.
鈥淎ny time a borrower calls one of these companies and wants help, if they鈥檙e told they have to pay an upfront fee, that is a red flag,鈥� Smith says. 鈥淚t means that this company is in it for profit and they鈥檙e a scam.鈥�
In many cases, it鈥檚 illegal for companies to charge an upfront fee to help customers settle debt or to take out a loan. State attorneys general in聽听补苍诲听聽have filed lawsuits, both still pending, alleging private student loan assistance companies violated state laws preventing companies from charging upfront debt-settlement fees.
As soon as a customer service representative tells you you鈥檒l be charged to consolidate your loans, to qualify for lower monthly payments or to have them forgiven, hang up and go to聽听颈苍蝉迟别补诲.
As soon as a customer service representative tells you you鈥檒l be charged to consolidate your loans, to qualify for lower monthly payments or to have them forgiven, hang up and go to听颈苍蝉迟别补诲. There, you can submit a free application for a Direct Consolidation Loan, if that鈥檚 what you鈥檙e looking for. Or you can explore聽聽on the government鈥檚聽聽website. You can also talk to a customer service representative through the federal government鈥檚 Loan Consolidation Information Call Center at 1-800-557-7392, Monday through Friday, from 8 a.m. to 8 p.m. EST.
Warning sign No. 2: 鈥楩ederal,鈥� 鈥榥ational鈥� or other official-sounding words in a private company鈥檚 name
Borrowers might think private companies they come across are affiliated with the government based on their names or URLs 鈥� when, in fact, they鈥檙e separate entities that are charging fees for services the government provides for free. Plus, only the federal government can perform many of the services for-profit companies claim to provide, which borrowers don鈥檛 realize.
鈥淎t the core, it鈥檚 a flawed business model that鈥檚 based on nondisclosure and essentially an exploitation of that information gap,鈥� says Andrew Weber, an Athens, Ohio-based credit counselor who specializes in student loan counseling.
In May, Illinois Attorney General Lisa Madigan聽聽against five firms with names like Federal Student Loan Alliance and Nationwide Student Aid. In December the Consumer Financial Protection Bureau (CFPB)聽聽IrvineWebWorks, Inc., which runs the websites Studentloanprocessing.us and Studentloanprocessing.org. The CFPB said in its聽that IrvineWebWorks misled customers into thinking the company had an official relationship with the Department of Education.
Borrowers should be especially cautious about giving out their Federal Student Aid ID or Social Security Number to a third-party company, according to the office of California Attorney General Kamala Harris, which released a聽聽in August in response to what it called a growing number of constituent complaints about student loan scams.
What to do instead: If the website you鈥檙e looking at isn鈥檛 studentloans.gov or studentaid.ed.gov and it鈥檚 purporting to be affiliated with the Department of Education, it could be a scam. Your best bet is to work only with your聽聽鈥� specific聽the government contracts with to manage borrowers鈥� loans 鈥� or the government directly.
Warning sign No. 3: Promises to provide immediate relief, forgive student loans outright or get you out of default
Student debt relief companies often advertise that they can get your loans forgiven, lower your monthly payments or settle your debt if you鈥檙e in聽. But loan forgiveness doesn鈥檛 happen automatically. In practice, these companies usually help customers apply for a Direct Consolidation Loan, in which the government pays off your individual loans and issues you a new one that combines your previous balances, Smith says.
鈥淲hen a person calls one of these scam companies, what they鈥檙e going to get is consolidation most of the time because that is the cheapest and easiest thing for the company to put them into,鈥� she says. 鈥淚t requires the least amount of work.鈥�
Consolidating is also the only way for borrowers with some types of federal loans to qualify for聽听辞谤听聽(PSLF), which forgive their remaining loan balances after they鈥檝e made payments for a certain number of years. So when a company says it will forgive your loans, they鈥檙e actually letting you know whether you qualify for an income-driven repayment plan or PSLF. But only borrowers who fall into specific income thresholds, or who work in certain public-interest jobs, are eligible for those programs.
What to do instead: Use Federal Student Aid鈥檚聽聽tool to see if you can take advantage of income-driven repayment. If you work in public service, you may be able to have your loans forgiven after 10 years through PSLF. Call your loan servicer or the Federal Student Aid Information Center at 1-800-433-3243 to find out if these options are available to you.
Warning sign No. 4: It鈥檚 being advertised on Facebook, on the radio or at the top of search results
You should automatically view student loan assistance companies that pay to advertise their services with skepticism, Smith says. It usually means they鈥檙e in the business for profit, and since you never have to pay to consolidate your federal loans or to switch repayment plans, that鈥檚 a sign the services they offer could be a scheme to mislead you into paying for otherwise free assistance.
For-profit student debt relief services have also appeared high in search results for terms like 鈥渟tudent loan default,鈥� 鈥渟tudent loan forgiveness鈥� and 鈥淥bama student loan relief,鈥� former CFPB student loan ombudsman Rohit Chopra wrote in a June聽聽warning Google that some companies may be misrepresenting themselves in online ads.
鈥淲hile we have warned consumers about these scams, we are concerned that unscrupulous companies may be using aggressive advertising through search products to lure distressed borrowers,鈥� Chopra wrote.
What to do instead: When you鈥檙e ready to consolidate your student loans or switch repayment plans, ignore websites that don鈥檛 include 鈥�.gov鈥� in their URLs, or that don鈥檛 belong to one of the government鈥檚 official loan servicers. If you hear an ad on the radio, be wary if it offers unrealistic-sounding services like loan forgiveness, cancellation or settlement. Instead of calling the number listed, reach out to your loan servicer to ask what relief you might qualify for.
The takeaway
It can be difficult to know where to go for help when you鈥檙e new to student loan repayment. But remember that only the Department of Education can consolidate, forgive or lower the amount you pay on your federal loans, and it鈥檚 always free to work with your loan servicer or the government directly to change your repayment terms if you need to.
Student debt relief companies have popped up because filling out the necessary paperwork can be complicated and time-consuming, says Smith of the National Consumer Law Center. But if you arm yourself with the right information, you鈥檒l know how to ask the government for free help, and you won鈥檛 lose money on a scam that could be going toward your debt instead.
鈥淚f it sounds too good to be true,鈥� Smith says, 鈥渋t might be.鈥�
Brianna McGurran is a staff writer at NerdWallet, a personal finance website. Email:bmcgurran@nerdwallet.com. Twitter:聽.
