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 “have your loans discharged,” or when an ad on the radio urges, “Call us today to qualify for loan forgiveness.”
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 consolidate borrowers’ multiple federal loans into a Direct Consolidation Loan. These companies’ tactics are deceptive and costly, officials say, because they’re 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’t offer flexible repayment plans or loan forgiveness.
And while these companies’ 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 report, “Searching for Relief: Desperate Borrowers and the Growing Student Loan Debt Relief Industry.”
“They aren’t, as they represent, looking at the person’s factual circumstances and financial circumstances and giving them advice about the best option for them,” Smith says.
It’s 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’t fall prey to a predatory student loan scheme. Here are five warning signs that the student loan relief you’re being offered isn’t what’s best for you — 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 — though many borrowers don’t realize it.
“Any time a borrower calls one of these companies and wants help, if they’re told they have to pay an upfront fee, that is a red flag,” Smith says. “It means that this company is in it for profit and they’re a scam.”
In many cases, it’s illegal for companies to charge an upfront fee to help customers settle debt or to take out a loan. State attorneys general in Minnesota and Illinois 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’ll be charged to consolidate your loans, to qualify for lower monthly payments or to have them forgiven, hang up and go to studentloans.gov instead.
As soon as a customer service representative tells you you’ll be charged to consolidate your loans, to qualify for lower monthly payments or to have them forgiven, hang up and go tostudentloans.gov instead. There, you can submit a free application for a Direct Consolidation Loan, if that’s what you’re looking for. Or you can explore switching repayment plans on the government’s Federal Student Aid website. You can also talk to a customer service representative through the federal government’s 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: ‘Federal,’ ‘national’ or other official-sounding words in a private company’s name
Borrowers might think private companies they come across are affiliated with the government based on their names or URLs — when, in fact, they’re 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’t realize.
“At the core, it’s a flawed business model that’s based on nondisclosure and essentially an exploitation of that information gap,” says Andrew Weber, an Athens, Ohio-based credit counselor who specializes in student loan counseling.
In May, Illinois Attorney General Lisa Madigan filed lawsuits against five firms with names like Federal Student Loan Alliance and Nationwide Student Aid. In December the Consumer Financial Protection Bureau (CFPB) sued IrvineWebWorks, Inc., which runs the websites Studentloanprocessing.us and Studentloanprocessing.org. The CFPB said in itscomplaint 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 consumer alert 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’re looking at isn’t studentloans.gov or studentaid.ed.gov and it’s purporting to be affiliated with the Department of Education, it could be a scam. Your best bet is to work only with your loan servicer — specific companiesthe government contracts with to manage borrowers’ loans — 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’re in default. But loan forgiveness doesn’t 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.
“When a person calls one of these scam companies, what they’re going to get is consolidation most of the time because that is the cheapest and easiest thing for the company to put them into,” she says. “It requires the least amount of work.”
Consolidating is also the only way for borrowers with some types of federal loans to qualify for income-driven repayment plans or Public Service Loan Forgiveness (PSLF), which forgive their remaining loan balances after they’ve made payments for a certain number of years. So when a company says it will forgive your loans, they’re 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’s Repayment Estimator 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’s 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’re in the business for profit, and since you never have to pay to consolidate your federal loans or to switch repayment plans, that’s 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 “student loan default,” “student loan forgiveness” and “Obama student loan relief,” former CFPB student loan ombudsman Rohit Chopra wrote in a June letter warning Google that some companies may be misrepresenting themselves in online ads.
“While 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,” Chopra wrote.
What to do instead: When you’re ready to consolidate your student loans or switch repayment plans, ignore websites that don’t include “.gov” in their URLs, or that don’t belong to one of the government’s 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.
It can be difficult to know where to go for help when you’re 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’s 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’ll know how to ask the government for free help, and you won’t lose money on a scam that could be going toward your debt instead.
“If it sounds too good to be true,” Smith says, “it might be.”