Identifying and avoiding student loan scams is challenging. I routinely see advertisements for student loan forgiveness, consolidation, and other special programs. As a lawyer who has advocated for borrowers for nearly a decade, I sometimes struggle to determine what services are legitimate and what is a scam.
It is easy to understand why there are so many student loan related scams. Student loan repayment is a complicated maze of federal rules and regulations. Finding accurate information or advice is often a challenge. Add in the stress of massive debt, and you create an easy mark for a scammer.
The purpose of this article is to help borrowers identify and avoid student loan scams. Much of the advice contained below comes directly from the Federal Trade Commission (FTC) or the Consumer Financial Protection Bureau (CFPB). I’ve also included details on some of the types of scams that I’ve seen over the years.
What Does a Student Loan Scam Look Like?
The most effective scams that I have seen create a sense of urgency with borrowers. Act now before the opportunity disappears.
For many responsible borrowers, a limited offer is worth investigating. If there is even a chance it might be real, the potential savings would be enormous.
While the rules for student loans do change, it never happens quickly, and it never costs any money to benefit. All federal student loan programs are free to enroll, and paying for expert help handling paperwork is almost always a mistake.
This graphic from the FTC best summarizes some of the telltale signs of a scam:
Lower Student Loan Interest Rates: Real or Scam?
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 of them work with both federal and private student loans.
The legitimate 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 provide 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. 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.
Obama, Trump, or Biden Student Loan Forgiveness
Scammers love to advertise forgiveness programs associated with the current president. They try to benefit from the current harsh political climate by appealing to a particular point of view.
However, it isn’t fair to say that all federal forgiveness programs are a scam. It has just been my experience that if somebody attaches the President’s name to the program, it is more likely to be fraud of some sort.
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 and the military.
Enrollment in the legitimate programs can be done directly through 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 Scams
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 to gain eligibility for certain programs. For example, FFEL loans are not eligible for public service loan forgiveness, but they can be included in 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 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.
$0 Per Month Student Loan Payments
Like many other scams, the $0 per month payment scams start with a legitimate federal program and use it to take advantage of borrowers.
What is Legitimate – Federal student loans do have income-driven repayment plans. If your income is below a certain level, or if you don’t have any income, your monthly payment could actually be $0. It is also possible that your loan could eventually be forgiven. This is something that you can do directly with your student loan servicer and it requires no expertise or special knowledge.
When $0 Payments are a Scam – If you see income-driven payments being advertised, odds are pretty good that it is not legitimate. The customer service representatives should be trained to tell borrowers about this option, but loan servicers and the federal government are not going to spend money advertising these options. There is no incentive for the government to advertise this program. They make it available for the borrowers who need help.
Private lenders don’t have income-driven repayment plans. If you see an advertisement for the program, somebody is probably trying to sell you something, and odds are good you don’t want to buy it.
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 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. Time with student loan consultants is normally very expensive, and can often require an ongoing monthly fee without any future services 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 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.
Also, because several people have asked, I do not take on individual clients. I’m not looking for extra business by offering this guidance, just trying to help people figure out when it is time to hire a professional.
Red Flags to Avoid
If the specific details covered so far don’t apply directly to your situation, the Consumer Financial Protection Bureau has some excellent general guidelines for identifying and avoiding student loan scams.
According to the CFPB, the following are all signs of a scam:
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 ID. Be cautious about companies that ask for your Federal Student Aid ID. Your FSA ID — 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 FSA ID to access your student loan information.
A Couple Final Tips from the Sherpa
I once received a call from a student loan company that was going to fix my student loans. The glaring red flag was the fact that they didn’t even know my name. If you are calling me to offer a service and you don’t even know my name, I know you are a spammer. Enough Americans have student loan debt that some scammers just call every phone number they can.
However, I’ve received mail from companies that had detailed information about my student debt situation. After some investigation, I was able to determine that this particular company was a scam attempting to charge me for free federal student loan programs. The lesson: companies that have your loan information on file may not be legit. To this day, I have no idea how the scammers knew about my debt balance.
Finally, calls, texts, emails, letters, and ads about brand new laws and special programs from Congress are almost always scams. Any new student loan program from the government gets a ton of attention. These programs are easy to verify via a quick Google search. Don’t ever assume that some company has special access or information.