Deciding whether or not a student loan service is legitimate or a scam has become increasingly difficult. A lot of promises are being made regarding government programs, “relief” agencies, refinance companies, and loan advisors. Some are legitimate and excellent opportunities for consumers, many others are wastes of time and money.
Today we will look at common promises and programs. For each item covered we will break down what it looks like if it is legitimate and what it looks like as a scam.
Lower Student Loan Interest Rates
This is a promise that can be difficult to distinguish between the good guys and the bad guys.
What is Legitimate – There are many student loan refinance companies that can actually lower your interest rates. Most all of them work with both federal and private student loans. These companies make money by offering lower interest rates to borrowers who are highly likely to pay back their student loans. These lenders pay off your existing debt in full with your old lenders and then you pay back the new company at what is hopefully a lower interest rate. The aggressive advertising, low interest rates, and sign up bonus often trigger the “too good to be true” alarm for many consumers.
The best way to know you are dealing with a legitimate company is that good credit will be required. They will need your credit report to figure out if you are someone who pays back their debt and can afford the loan.
There are many companies offering this service. We have ranked and reviewed the nationwide companies offering refinancing. Some did receive negative reviews from us, but they are still legitimate companies… they just offer rates and terms we think could be better.
When a Lower Rate is a Scam – One of the biggest red flags is if you are being promised lower interest rates and student loan forgiveness. You can get lower rates by refinancing your federal loans, but those loans become private loans and lose their ability to qualify for federal forgiveness programs. Alternatively, you can start working towards federal forgiveness, but the government won’t be cutting your interest rate.
If everybody gets a lower interest rate it is also probably a scam. The refinance companies only make money if they are smart in choosing their customers. If they pay off the loans for people who won’t pay back their debt, they will lose money.
Student Loan Forgiveness, or Obama Loan Forgiveness
This is a tricky one because there are some excellent student loan forgiveness opportunities for borrowers, but it is also a promise often made by student loan scammers.
What is Legitimate – Many student loan forgiveness programs exist for federal student loans. The most common are Public Service Loan Forgiveness and forgiveness as part of an income-driven repayment plan. There are also programs for people in certain occupations, such as teachers.
Enrollment in the legitimate programs can be done directly though your federal student loan servicer. No special expertise is required, but researching and understanding the programs is very helpful for preventing errors. Further, there is no cost to signing up for any of the student loan forgiveness programs. They were created by federal law and are often a term in your student loan contract with the government.
Legitimate student loan forgiveness does not immediately wipe away all of your debt. It takes years to reach. For some borrowers it is a good idea, while others will be better off aggressively paying off their debt.
Student Loan Forgiveness Scams – One of the biggest giveaways to a student loan forgiveness scam is a high pressure sales environment. If somebody is aggressively trying to push you into a program that will erase your debt it should be a red flag. Another huge red flag is any fees associated with the program. Again, student loan forgiveness is federal law, and signing up costs nothing. There should be no enrollment fees or monthly costs.
Another common red flag is when a company advertises a special relationship with the Department of Education. These don’t exist. Student loan programs are open to all federal borrowers and no outside company has the ability to change your eligibility.
Finally, if you are working with a company that requires your FSA PIN, now known as the FSA ID, you are likely getting scammed. The Department of Education makes it clear that the borrower is the only person who should have access to this number.
Enrollment in any student loan forgiveness program is done between you and your federal student loan servicer. Any third-party that tries to enroll on your behalf likely has bad intentions. At best they are charging you money to fill out forms that you could submit on your own. At worst, they are flat-out stealing your money or your identity.
Student Loan Consolidation
Student loans are consolidated when multiple existing loans are combined into one new larger loan. There are also two types of consolidation. One is federal student loan consolidation, and the other is private loan consolidation. For many borrowers, student loan consolidation is a helpful or even necessary step. Unfortunately, there are also scammers advertising student loan consolidation services.
Legitimate Student Loan Consolidation – Many borrowers elect to consolidate their federal loans in order to gain eligibility for certain programs. For example, FFEL loans are not eligible for public service loan forgiveness, but they can be included into a federal direct consolidation loan and gain public service forgiveness eligibility. Federal student loan consolidation can only be done directly with the federal government. This process can only take place using the Department of Education consolidate site.
Private loan consolidation is a term often used interchangeably with student loan refinancing. If you are working with a private company, you shouldn’t be paying anything for the service, and the end result should be lower interest rates. The downside is that you lose federal perks. This is a good option for some borrowers and a mistake for others. Our refinance lender page has some suggestions to consider when making this decision.
Student Loan Consolidation Scams – If you are paying for this service, it is almost definitely a scam. Whether you are consolidating your federal loans for program eligibility or consolidating on the private market for a lower interest rate, the cost to you should be $0. Another red flag is if the company you are working for asks for your FSA ID or FSA PIN.
Personalized Student Loan Consultations
There are numerous student loan “specialists” offering personalized advice for individual student loan circumstances. This is a gray area in the world of student debt. It probably isn’t fair to label these individuals and companies as scams, but for many, calling them a reputable service would also seem like a stretch. Finally, I’ll add that much of what I’m about to say about these consultants is my personal opinion developed from years of researching and blogging about student loan issues.
The Cause for Concern – For the majority of student loan borrowers, there shouldn’t be a need to hire a specialist. Unlike preparing your taxes, where programs and eligibility can be extremely complicated, student loans are something that can be managed by any borrower. It may be a bit confusing at first, and take some time to sort out, but it can definitely be done.
Hiring a student loan specialist is like paying someone to clean your house. Even though it isn’t a pleasant task, it is something that doesn’t require outside help. Not only does going the lazy route cost money, but you expose yourself to theft. Plus, when you do the job yourself, you will do a better job because it is more important to you. It might take you longer, but you won’t cut any corners. Further, when you do the job yourself you learn and get better with the monthly management of things. Where hiring a housekeeper is much different is cost. Time with student loan consultants is normally very expensive, and can often require an ongoing monthly fee without any future services actually being performed. Ultimately, paying someone to manage your student loans instead of doing it yourself is a high risk, low reward option.
Having noted my concerns, I will say that there are people out there who charge a fair price and provide a quality service. The problem is that it can be nearly impossible to separate the quality services from the ones that should be avoided. If you are seriously considering going this route, take a very close look at the individual or company you have in mind.
When to Seek Professional Help – If you have been the victim of fraud or identity theft or you think you need to declare bankruptcy, it is probably time for expert assistance for your personal situation. In this instance, it is usually best to seek the advice of a local attorney. Student loans are federal, but many of the applicable laws can vary state by state. Paying an attorney can be a very expensive option, but the rules and codes of conduct for attorneys are far more strict and closely supervised than what they are for student loan consultants. It won’t guarantee that you won’t be duped, but it will dramatically lower the chances.
In the world of student loans there are some great resources, and there are some very devious people out to take advantage of borrowers. Sometimes separating the good guys from the bad guys can be difficult.
The important thing to always keep in mind is that both exist. Double check what you see and hear and don’t let what you wish was true get in the way of your better judgment.