You know it, we know it—student debt is tough.
Some months, it seems impossible to find enough cash to buy food, pay rent, pay the phone bill, AND pay off your student loan. According to the Federal Student Aid Data Center, as of December 2016, about 31.5 million students owe almost $950 BILLION.
With so many students owing so much money, there is a ton of predatory companies out there looking to take advantage of people that may be struggling to keep up. These companies offer a variety of “solutions” and/or “assistance” to pay off and even eliminate your student loan, and the offer can be quite tempting.
However, many of these promises are well-disguised scams, taking your money and personal information while actually doing nothing on your behalf. It’s important to be aware of these scams and what they look like. Being vigilant and knowing your options are the best protections against fraud and identity theft.
What do debt relief scams look like?
Just as there are many different ways to obtain student loans, there are a variety of forms that so-called “debt relief” scams can take. We have compiled a list of the most common ones and how they manage to “hook” people who are unaware.
1. Advanced Fee Scam: “Pay us a small fee upfront and we will get you better terms/lower interest on your student debt!”
If a company asks you to pay substantial fees upfront, run the other way as fast as you can.
Under no circumstances should you be paying money to get money. Legitimate loan assistance programs will never request an advanced fee for services that have not been performed. Federal loans require a 1% default fee, but no origination charge. Some private lenders charge a fee, but that money is usually negotiated between you and the lender, and then either deducted from the loan disbursement or spread out over a repayment period.
If you choose to find a third-party company to assist you with your debt, they may charge a fee at the beginning. However, that money should go into an escrow account and only be paid to the company once the promised services have been rendered.
Be wary of any upfront costs disguised as “processing” or “administrative” fees. Companies requiring these types of charges will usually just take your money and run. Save it for your monthly student debt bill instead.
2. Lawsuit Scam:“We will negotiate with the government on your behalf to settle your student debt.”
This one has tons of variations but they all follow the same playbook. A law firm will ask you to pay them the balance of your federal loan, or as much as you can all at once, and they will then attempt to negotiate your debt down to a settlement of that amount. They may even claim to have special contacts within the Department of Education that will make this process easy and quick.
But what actually happens?
Lawyers may begin negotiations with the government, but this process can take a long time, sometimes years. In the meantime, the law firm is not making payments on your debt, which will eventually put you into default. This leaves you with a ruined credit score and lowers the possible settlement amount that you are still waiting for.
By the way, a settlement is never a guarantee. Even if you do reach a settlement, you may have paid thousands of dollars in legal fees—dollars that could have gone towards paying off your student debt. This is not to say that every law firm offering help with your student loan is out to scam you.
There are some good reasons to seek legal help when it comes to student debt; this article has helpful information.
3. Consolidation Scam: “We will help you take your multiple student loans and consolidate them into one easy monthly payment.”
This is the most voracious scam out there at the moment. If you are a student with three or four loans from different federal agencies and private lenders, all with different repayment terms and interest rates, you can see how tempting this offer could be.
You do not need to pay for help consolidating your federal student loans. You can do it yourself here. For free.
Companies claiming to help you consolidate your loans will often take a “processing” or “consolidation” fee and then do nothing. If you have private student loans, there are a number of legitimate options for refinancing them, even combining your federal loans with your private ones.
Refinancing involves taking out a new loan with new terms and paying off your existing loans. Private lenders like Upstart and Sofi offer competitive interest rates, income-based repayment programs, and job-loss protection when you refinance student loans with them.
Click here for reviews on leading student loan (and refinancing) providers.
4. Debt Elimination Scam: “We will help you make your student debt disappear!”
To be clear: this is virtually impossible.
Only in specific circumstances will student debt be entirely eliminated, such as death or permanent disability. Any company promising to make your student debt disappear is scamming you. Period.
However, there are forgiveness options available. Those entering careers in teaching or public service jobs may qualify for forgiveness after a certain number of years.
The Federal Student Aid website has a complete list of instances where federal student debt will be forgiven or eliminated.
Red flags to watch out for
- Anybody that claims a special relationship with the Federal Department of Education.
- Promises of a set payment or forgiveness amount.
- Promises to buy your loan(s) and settle for a set amount.
- Immediate forgiveness or elimination claims.
- Claims that, because your school is closing or being sued, your loans will be forgiven or canceled.
Remember, when it comes to Federal Student Loans:
- Enrolling in repayment plans for Federal Loans is completely free
- Debt relief companies have no power to negotiate with your Federal Loan creditors to get you better terms, lower interest, etc. They also have no “special” relationship(s) within the Department of Education.
- Qualifiers, requirements, payment amounts, etc. for Federal repayment programs are set by federal law and are not up for negotiations by debt relief companies or otherwise.
When it comes to private lender loans:
- Private lenders usually won’t consolidate your loans (combine all owed amounts into one), but will help you refinance your loans (take out a new loan with new repayment terms to pay off existing ones).
- Private lenders offer variable or fixed interest rates, and repayment terms are usually negotiable to suit your needs.
- Job-loss protection and income-based repayments are sometimes available when you refinance student loans privately.
Again, we have compiled a full list of reputable private lenders that refinance student loans with excellent terms. Read the reviews from real customers here.
What to do if you are victim of a scam
If you think you’ve been the victim of a student loan scam, don’t panic– there are some steps you can take.
- Step 1: Call a credit bureau (Equifax, Experian, and Transunion are the big three) if you gave out personal information such as Social Security Number, date of birth, etc. Report a fraud and try to freeze your credit so that it isn’t affected by any possible actions the company may take.
- Step 2: If you gave out your FSA ID, call the Office of the Inspector General They will help you settle on a course of action.
- Step 3: Consider reporting the company to the Consumer Financial Protection Bureau by calling 855-411-2372.
*Remember, offering help with student debt relief is not illegal/fraudulent, but taking money for services not rendered is.
- Step 4: If you gave out credit or banking information to pay for an advance fee, try calling the institution to stop payment. If you don’t make it in time, sometimes you can regain your money if you can prove the business was a scam.
These steps are damage control and can help mitigate any fallout that may result if you’ve fallen victim to a debt relief scam. The golden rule to remember is that, if it sounds too good to be true, it probably is.
Your best protection is knowledge and research! Before you jump into any contracts or pay any fees, make sure that you are dealing with a legitimate company.
Tips for reducing risk
Keeping these tips in the back of your mind when looking for student debt relief can help reduce your risk of falling victim to a scam:
- Regularly review any aid applied for and received, and keep track of repayment schedules and terms.
- Keep documents related to your student loans in a safe place.
- Keep receipts and documents related to payments, bank statements, etc. in a safe place and shred them when they are longer needed.
- Never give out credit card or banking information over the phone.
- Never give out personal information (SSN, date of birth, etc.) over the phone.
- Immediately report possible fraud or identity theft to a credit bureau.
Most importantly, don’t think that there is no help available for you if your student debt is reaching a critical point. Whether you’ve hit a rough patch with your job or are facing a financial crisis, there are legitimate companies out there ready to assist you.