On Monday, Illinois became the first state to sue so-called debt settlement companies for fraudulent student loan practices. The New York Times reports that two companies, Broadsword Student Advantage and First American Tax Defense, were sued for charging customers for debt assistance they never received.
Debt settlement companies, which consumers pay for help consolidating their loans and decreasing their monthly payments, have long had a reputation for taking advantage of desperate borrowers eager for a quick fix. With Americans now holding $1.2 trillion in outstanding student loans, college grads appear to be an increasingly attractive target.
According to court documents, the typical scam involves offering debtors a variety of services—some non-existent, some that are already offered free through federal programs—in exchange for money up front. First American even made up fake government relief initiatives—like the "Obama Forgiveness Program"— to entice customers, and feigned affiliation with the Department of Education. Rick Cibelli, an Illinois caregiver, told the Times he payed First American $175 over the phone to help pay down his $10,000 of student debt before learning the company's purported federal connections were false.
The most frustrating part of debt relief fraud is that a legitimate version of the services offered by scammers are usually available at no cost to borrowers. Common student loan scams include offering to consolidate student loan payments (putting multiple loans under one lower monthly fee), debt forgiveness, or lower monthly payments. All of these services are offered free of charge by the Department of Education to eligible borrowers.
Persis Yu, a staff attorney at the National Consumer Law Center's Loan Borrower Assistance Project, says she's never seen a loan assistance company offer anything that isn't already offered by the federal government. "The bottom line is they're charging you for information you can get for free," says Yu. In a 2013 report, the National Consumer Law Center found some student loan relief agencies charged up to $1,600, or $20 to $50 a month, for what amounts to filling out a few forms.
Yu believes that the primary cause of student loan relief fraud is a failure to educate the public about current government options. "There is an information vacuum, which I think is one of the reason why these companies have been successful," laments Yu. Mark Kantrowitz, publisher of Edvisors.com, agrees. He advocates legislation that would require debt settlement agencies to clearly and conspicuously disclose that the services they offer can be also be obtained for free. "There's nothing illegal about charging a fee for a free service," said Kantrowitz "but when it strays into the realm of being misleading about what you're charging a fee for, that becomes problematic." Similar legislation already exists for companies that help families file the Free Application for Federal Student Aid (FAFSA).
Luckily, careful borrowers can avoid a scam. Yu says that anyone looking for student loan assistance should contact the servicer of their loan directly to discuss their available options. Any program not referred to them by the loan servicer should be considered highly suspect. Those with older loans granted under the Federal Family Education Loan program should also be careful when speaking to their lender about consolidation because these lenders are not required to disclose government consolidation options.
Unfortunately, outside of your current lender, there are precious few reliable resources for those with student debt. "We have had instances where borrowers who do contact their services don't get the best information, so it's incumbent on borrowers to get the best information," Yu said.
One good resource is the NCLC's own website, StudentLoanBorrowerAssistance.org, which offers trustworthy advice on loan repayment options, as does Edvisors.com. The Department of Education also offers excellent online materials, like a fact sheet on loan consolidation, including how to apply for a consolidated loan. The same site also explains various term-extension options, including a calculator that will use your income, loan amount, and interest payment to estimate how much you would pay per month and in total under various repayment plans. The Department of Educations also maintains a toll-free number, 1-800-4-FEDAID, that offers loan information.
Public sector workers, or those who meet various other conditions, may be eligible for forgiveness, cancellation, or discharge of their loan. This page explains the various requirements and how to take advantage of any programs you qualify for.
There are also a number of private refinancing options that can lower long-term interest payments. Matt Krupnick of the Hechinger Report writes that companies like Pave and CommonBond offer certain graduates advantages like flexible loans or low-interest payments. Kantrowitz says these loans can be great options for graduates who have good jobs and high credit scores, but are generally unavailable to borrowers struggling to meet their current payments.
Yu also cautions that while private refinancing can mean lower rates, it also means losing many federal protections, like forgiveness in the case of disability or death, or government income-based repayment plans. "If someone is going to consider refinancing, they need to know they will lose their rights under a federal loan," said Yu. "That will have to be a cost-benefit analysis."