The rise of student loan consolidation scams (and options for actual help)
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Here’s a handful of student loan numbers for you. According to the Consumer Financial Protection Bureau, current student loan debt is nearing $1.2 trillion. An estimated 7 million borrowers are now in default; behind on $100 billion in debt.
All of which adds up to a juicy market for companies looking to cash in on people with student debt troubles.
This week, Illinois Attorney General Lisa Madigan filed suit against two student-loan debt-settlement companies. The suits allege that Broadsword Student Advantageand First American Tax Defense tricked borrowers into paying upfront fees for student loan help the companies didn’t provide.
According to one of the filings, First American Tax Defense promised enrollment in a fake “Obama Forgiveness Program.”
Madigan said these companies run ads that entice people excited to call, “and what they really find out is that these are scam artists [who] want their money.”
In a 2013 report, the National Consumer Law Center found that “a new ‘student loan debt relief’ industry has sprung up in response to the demand for borrower assistance and the dearth of reliable resources.”
“There’s a lot of debt, it’s very confusing,” said NCLC attorney Persis Yu. “I think some borrowers are desperate and they are turning to places that look like they might be an easy fix.”
She says many of these debt-settlement companies mischaracterize government programs as their own.
They charge borrowers as much as $1600 for services, like debt consolidation, that are available from the government for nothing.
“What’s making this possible is a lack of awareness of repayment options,” said Mark Kantrowitz, student financial aid expert from Edvisors.com.
He says the government should run an ad campaign of its own, so students with debt know what help is available for free.
If you are struggling to pay back your federal student loans, here are your options:
- Direct consolidation: If you have multiple federal student loans you can consolidate them into one payment and extend the life of the loan to 30 years to lower monthly payments.
- Extended repayment: Borrowers with more than $30,000 in debt can extend the repayment period from the standard 10 years up to 25.
- Graduated repayment: Borrowers who choose extended repayment can also set up monthly payments that start low and grow every two years.
- Income-based repayment: Your monthly payment is pegged to your income and can be adjusted annually to account for income fluctuations. The term of the loan can also be modified to go beyond 10 years.
- Income contingent repayment: Your payment based on your monthly income and any outstanding debt is cancelled after 25 years.
- Pay-as-you-earn: For borrowers who took out loans after 2007 and have a family or financial hardship. This income-based plan offers the lowest monthly payment options of any income-based plan.
How to spot a scam:
- High-pressure sales tactics, like suggesting your interest rates are about to skyrocket, without debt consolidation.
- Charging fees before debts are settled
- Touting a “new government program” or suggesting they have special access to government programs
- Claiming to represent the Department of Education or other government agency
- Offers of discounted pay-back rates, gifts or special incentives
- The hard sell, plain and simple
The federal government and other organizations offer free, legitimate relief for those who have fallen behind on their student loans:
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