Sorting out student loan advertisements can be tricky for many consumers. With Americans owning nearly $2 trillion on their student loans, many are confused and desperate for help and for good news. This makes student loan borrowers prime targets for student debt relief scams.
While the government, especially at the state level, has gotten better about shutting down scammers, they are also in a game of whack-a-mole. Each time they shut down one fraudulent student loan operation, another one pops up.
This means consumers need to be very careful when investigating student loan services like student loan consolidation.
Federal Student Loan Consolidation
There is exactly one place to go for federal student loan consolidation… that would be the Department of Education.
The government doesn’t spend any money advertising the consolidation service, so it isn’t a shock that some might try to take advantage of an unsuspecting borrower.
We should also note that federal student loan consolidation is not about getting a lower interest rate. In fact, federal consolidation just combines the loans and the new interest rate is based upon the weighted average of the old loans.
However, just because a borrower cannot get a lower interest rate it doesn’t mean they shouldn’t go through federal consolidation.
Federal direct consolidation can do the following:
- Converting loans for program eligibility (as an example some FFEL loans can be consolidated to become eligible for Public Service Loan Forgiveness)
- Combining loans that may be with multiple servicers into a single loan with a single servicer
- Converting loans so that they can be eligible for certain Income-Driven Repayment Plans (as an example, Parent PLUS loans can be consolidated in order to become eligible for the Income-Contingent Repayment Plan)
Finally, the most important thing to keep in mind with Federal Direct Consolidation is that there is no way to “undo” it. That means it is critical to discuss things with your loan servicer and to do your research ahead of time. Just as federal direct consolidation can help your federal program eligibility, it can also mess things up.
The possibility of screwing things up is another reason that borrowers should avoid paying for outside assistance. The robo-calls and spam emails should be a huge red flag. If you are going to consolidate, go to the federal direct consolidation website and to it yourself. The forms only take a few minutes to complete.
Private Student Loan Consolidation
Private student loan consolidation, often called refinancing, is a different process.
In a private refinance, a lender will pay off existing loans if the borrower agrees to pay off a new loan according to new terms. A basic example would be a borrower who has three loans, each with a $5,000 balance. The three loans may have interest rates of 4%, 6%, and 10%. The new lender would pay off the old loans and the borrower would be responsible for paying off a new $15,000 loan. Borrowers usually refinance to get lower interest rates. Lenders refinance in order to earn interest while the borrower repays the loan. They are able to offer lower interest rates because they target borrowers who are strong bets to repay the loan.
When it comes to private consolidation and refinancing we see less scams. This is because it is really hard to fake paying off old loans.
The biggest mistakes we see borrowers making with a private refinance/consolidation is an error with federal loans. Most borrowers know that if you have federal student loans you are eligible for income-driven repayment plans and student loan forgiveness programs. Refinancing or consolidating with a private lender causes the borrower to lose out on these perks. It should only be done by borrowers who are certain they won’t be needing the borrower protections.
The other mistake that borrowers can make is not shopping around. Many lenders may not be scams, but they still might be a bad option. It is important to check interest rates and review the various lender options. A little bit of time researching can save hundreds of dollars per year.
Free consolidation services: Too good to be true or a scam?
The concept here is really simple. Free should be totally free. If it isn’t, it is probably a scam.
Companies that offer free forgiveness, free consolidation, and free enrollment in income based repayment plans in return for a small monthly fee are almost certainly a scam.
Student loan forgiveness programs are totally free… end of story… no fees, charges or exceptions.
Signing up for an income based repayment plan costs nothing… this is the job of federal student loan servicers… if you are not working directly with your federal loan servicer for an income-driven plan, it should be a huge red flag.
If a company isn’t clear about the service they are providing, or they need your FSA ID number, odds are good that they may be taking advantage of you. If you feel uncomfortable, trust your gut. There is nothing wrong with waiting a couple of days to think things over.