tips to avoid a student loan scam

Tips for Avoiding Student Loan Debt Relief Scams

Michael Lux Blog, Scam Alert, Student Loans 2 Comments

As the student loan crisis grows, the number of companies trying to take advantage of troubled borrowers continues to grow as well.  By far the most common scam involves charging borrowers huge fees to sign the up for free government programs.  Suppose you wanted to consolidate your federal government loans.  The government has a website, for any borrower to sign up for free.  However, some companies will charge you money to submit the form on your behalf.  They don’t make it any easier or add any value to the process, they just insert themselves as a middleman and charge a fee.  Similarly, some scams involve signing people up for IBR or PAYE.  These income based repayment plans are available to all borrowers; all they have to do is sign up through their loan servicer.  Some companies will advertise that they negotiate for lower rates on your behalf or have special relationships with the government.  In reality, they are just signing you up for a plan that you could have done yourself.

How do I avoid these scams?

The Consumer Financial Protection Bureau warns about the following red flags:

Pressure to pay high up-front fees.  It can be a sign of a scam when a debt relief company requires you to pay a fee up-front or tries to make you sign a contract on the spot.  These companies may even make you give your credit card number online or over the phone before they explain how they’ll help you.  Avoid companies that require payment before they actually do anything, especially if they try to get your credit card number or bank account information.  Not only is free assistance available through your student loan servicer, many times taking payment for debt relief services before providing help is illegal.

Promises of immediate loan forgiveness or debt cancellation.  Debt relief companies do not have the ability to negotiate with your creditors for a “special deal” under these federal student loan programs. Payment levels under income driven payment plans are set by federal law and, for most borrowers, loan forgiveness is only available through programs that require many years of qualifying payments.

Demands that you sign a “third party authorization.”  You should be wary if a company asks you to sign a “third party authorization” or a “power of attorney.”  These are written agreements giving them legal permission to talk directly to your student loan servicer and make decisions on your behalf.  In some cases, they may even step in and ask you to pay them directly, promising to pay your servicer each month when your bill comes due.

Requests for your Federal Student Aid PIN. Be cautious about companies that ask for your Federal Student Aid PIN. Your PIN — the unique ID issued by the U.S. Department of Education to allow access to information about your federal student loans — is the equivalent of your signature on any documents related to your student loan.  If you give that number away, you are giving a company the power to perform actions on your student loan on your behalf.  Honest companies will work with you to come up with a plan and will never use your PIN to access your student loan information.

Another way to avoid a potential scam is to ask whether or not what is being offered is something you could do for free on your own.  Many companies may compare it to an accountant who files taxes on your behalf, but if you hear this argument odds are they are trying to take advantage of you.  Accountants have years of training and help people navigate a very difficult tax code.  Signing up for loan consolidation or a different repayment plan is far easier.  No special training is necessary.  A good rule of thumb… if it is a federal program, you can sign up for it yourself, for free.

Finally, trust your judgment.  If something sounds too good to be true, it probably is.  There are some great federal programs available, but nothing will fix your debt situation over night.  Before you part with any of your hard earned money, be sure to do plenty of research on any company.  If you are careful, you can avoid becoming the victim of a debt relief scam.

  • The best way to avoid scams is to ask questions and never succumb to pressure for an immediate answer. Any legimate organization will never pressure you for an immediate answer. If they do, beware!

  • In general, loan consolidation will lower your monthly payment demand by centralizing all of your federal loans into one in which you will have up to 30 years to repay. You will be able to switch any variable interest to a fixed rate. Increasing the length of time to repay your debt will mean more payments and more interest. Make sure you compare your current costs to consolidated costs before you make any changes.