Melanie Stetson Freeman/The Christian Science Monitor
Hope Marie Harley works in the counseling office at Frederick Community College on a work-study program to avoid student debt, on October 6, 2015 in Frederick, Md.

Student debt-relief companies don't deliver on promises, study shows

If students are armed with financial literacy classes, fewer will be tempted by companies that urge them to restructure their debt, experts argue.

Every day, false promises of help lure in young college grads anxious to pay off their loans. So-called debt-relief companies make bold and sometimes misleading offers to the grads by charging for a service they could have easily performed themselves.

One company offers "Obama's new loan forgiveness program," which doesn't even exist.

College grads who pay to get help consolidating their debt spend more than $600, on average, for a service they could be getting straight from their loan provider for free, according to a joint survey from personal finance site NerdWallet and the nonprofit Student Debt Crisis, released this week. Yet the complicated federal student loan system has given rise to a "student loan debt relief industry" in which for-profit companies aggressively and deceptively advertise their services.

"Lower your student loan payment, in some cases as low as $5 - $25!" advertises Student Loan Consultants of America, one of more than 200 firms that promise to help students burdened by student loans. It might appear to have been sanctioned by the US Department of Education, since it touts the official agency seal on its website. In fact, it has no affiliation, and received a cease-and-desist order earlier this year for wrongly using the government seal.

Advocacy groups are raising a red flag that such for-profit debt relief companies are preying on the very people they claim to assist.

"It is time for the federal government to reign in these private companies that take advantage of thousands of distressed student loan borrowers across the country," writes Student Debt Crisis, an advocacy group, whose survey results were used in a new report criticizing the shady market.

Nearly half of the 6,363 people surveyed by Student Debt Crisis and NerdWallet in July had been directly contacted by a company charging for student loan debt relief, forgiveness, or consolidation. Many of these were reportedly hounded, with more than one-fourth being contacted on a weekly basis. Nine percent were convinced to pay for company services: more than $613, on average.

The Department of Education is trying to increase awareness about the scams and the fact that it provides free services for the one in four borrowers currently struggling to pay their loans on time.

"If they're saying they can cancel or reduce your loans but only for a cost, that's never the case. You can always work directly with us and it should always be free. With our Department of Education, it's always free to figure out if you can cap your monthly payments, consolidate multiple federal loans, or see if you can get forgiveness for those loans," former Secretary of Education Arne Duncan says in a Youtube video.

It's not necessarily illegal to charge for debt relief, but “student debt relief companies can easily cross over into practices that violate key consumer laws,” according to a 2013 report by the National Consumer Law Center.

The key to keeping young people from falling into the trap, say experts, is educating students in financial literacy as early as high school.

"We need young people to be financially literate before they engage in the student loan, not after. As you see here, we are trying to solve a problem which we think originated much earlier. If people are looking to debt consolidation, the loan they took wasn't appropriate," says Annamaria Lusardi, the academic director of the Global Financial Literacy Excellence Center at George Washington University.

Fifty-four percent of student loan holders didn't try to estimate monthly payments when obtaining their most recent student loan, and 53 percent said if they had the chance at a do-over, they would make different choices, according to a July survey by the National Financial Capability Study. Many couldn't answer basic economic questions, raising alarm bells; for example, only 33 percent of respondents know that it takes less than five years for debt to double, if borrowed at a 20 percent interest rate.

Phil Schuman, the director of financial literacy at Indiana University, noticed his students weren't well-informed about their own debt situation, making them susceptible to scammers. 

“We did a lot of focus groups initially where students either completely underestimated how much they had in loans or were not even aware that they had loans. So obviously it’s difficult to seek information about something you don’t even know you have,” says Mr. Schuman.

"One of the scams we’ve seen – well not a scam exactly, it’s a legitimate business, but certainly not a good practice – they’ll help you apply for the FAFSA, which is something you can do for free. The government stepped in and shut them down last year but the company just bought another web domain and did the exact same thing," says Schuman.

Indiana University established MoneySmarts, its Financial Literacy Office, in 2012 to get students informed about debt through lessons on the website, podcasts, one-on-one appointments with advisors, and group presentations by trained students. The amount of borrowing at Indiana University has dropped by about $44 million, or 16 percent since then, says Schuman.

Professor Lusardi supports financial education before students get to college. If people are looking to restructure their loan, she says, that's because they didn't make the correct decision when applying for the loan in the first place.

"I think it’s very, very important to have financial literacy in schools. It’s necessary in college for sure, but I think it’s also necessary to have it in high school and before, because that’s when they’re making these decisions. In college, they’ve already taken on these loans," she says.

"We cannot add $1.3 trillion in student loans and a generation of young people that's not financially literate," Lusardi adds. "Every year that passes when we don’t have financial literacy in schools, we have a generation of young people that's not prepared to deal with student loans and really every other financial decision."

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