This week, Illinois became the first state to sue companies that allegedly duped indebted college graduates into paying for student loan services they could have easily gotten for free.
It most certainly won’t be the last.
The business of bogus student debt relief services has been booming for years. With more than 40 million Americans collectively shouldering a $1.2 trillion student debt load, there is no shortage of customers willing to try anything to ease their burden. Capitalizing on borrower anxiety, these companies promise to either consolidate their loans or have their debt forgiven. They charge unknowing borrowers a hefty fee, and make off with the cash without ever doing anything. The phenomenon is much like the wave of predatory mortgage loan servicers that preyed on underwater homeowners in the wake of the 2008 housing crisis.
‘I knew I shouldn’t have listened’
Jenny Dawn, 31, was desperate enough to believe such a claim earlier this month. After eight years of diligently paying down her $60,000 student debt bill, the Boston teacher is still $29,000 in the red. With the birth of her daughter earlier this year, continuing to make $800 payments each month — even with help from her husband’s income — seemed nearly impossible.
Dawn had previously looked into a federal student loan forgiveness program specifically targeting public service workers, but she was told she didn’t qualify. So when she saw an ad for a new student loan forgiveness program on Facebook two weeks ago, she couldn’t help but hope.
The ad was posted by a company called Nationwide Student Loan Center. According to its website, NSLC is a California-based “document preparation” firm that helps students find ways to lower their student loan payments.
When Dawn contacted them, a company representative “said there was a new program called the Obama Forgiveness Loan that came out recently because the government wanted to help students get out of debt,” she says. “He asked me a bunch of questions about my income, my budget, my spending, everything. He plugged everything in and told me I definitely qualified.”
There was just one catch — in order to fill out the paperwork needed to apply for the program, Dawn would have to pay a $588 processing fee. When she balked, the representative urged her to reconsider.
“He was very aggressive and kept shooting numbers at me as to why this was the best option and said I could make payments in three installments,” she says. “I knew I shouldn’t have listened but my baby had just woken up and I was in a rush. I thought if it was true, I didn’t want to pass up an opportunity to get my loans taken care of.”
So Dawn handed over her credit card information and the rep emailed her a contract to sign online. Before she hung up, the representative gave her one last piece of advice: “If any of my lenders or debt collectors tried to contact me, he said I shouldn’t talk to them and I should only call him,” she says. That’s when she started to grow suspicious.
The next day, she called the Department of Education to see whether there really was a new loan forgiveness program. Indeed, there was a loan forgiveness program for public service workers, she was told — the same program she had already inquired about and didn’t qualify for. For good measure, the representative ran Dawn’s information through the system and confirmed that she still didn’t qualify. Luckily, she was able to cancel her credit card before she was ever charged for NSLC’s services.
We reached out to Nationwide Student Loan Center for comment, but so far they have not returned our messages.
How to know you’ve been duped
Persis Yu, a staff attorney for the National Consumer Law Center (NCLC), says cases like Dawn’s aren’t uncommon.
“Because borrowers are struggling, they are constantly looking for a solution,” Yu says. “But they don’t realize they’re paying for paperwork they could do for free.”
The idea of paying a professional to prepare an application for a debt consolidation or loan forgiveness program isn’t entirely off the wall. We pay tax attorneys and CPAs to handle our taxes every year even though we can do it on our own. Some students who find themselves tangled up in a mess of different types of student loans may actually benefit from seeking professional help from an expert, Yu says.
But the problem with some student debt relief services is that they aren't offering one-on-one debt counseling and they don’t make it clear to borrowers that the service they do offer — federal loan consolidation — is easily available for free elsewhere. Buried in the four-page customer agreement Dawn was asked to fill out was a line acknowledging that she could apply for the loan forgiveness program on her own. She claims the representative she spoke with, however, made no mention of it and urged her to sign the form without reading it.
In a 2013 report, the NCLC investigated 10 student debt relief firms in the U.S. None of them publicized their processing fees on their websites, it found. Initial fees went as high as $1,600 and included monthly service fees of $20 to $50. In January, New York Gov. Andrew Cuomo formed a special Student Protection Unit in response to complaints about bogus debt relief firms. The group issued subpoenas for information to more than a dozen debt relief firms and are currently conducting an investigation into potential fraud.
Fees aside, the biggest red flag that borrowers are dealing with a fraudulent firm is when they caution them against communicating with their lenders directly. By urging borrowers to ignore calls from their lenders or debt collectors, these firms are suggesting that borrowers can’t apply for loan forgiveness or debt consolidation programs on their own, which, of course, isn’t true.
There is only one federal loan consolidation program. Any federal student lender will be able to help you apply for free. A business that attempts to convince you otherwise -- and makes big promises as to what it can do for you -- doesn’t have your best interests at heart. The government doesn’t sanction debt relief firms, either, so don’t trust a business that claims they’ve been approved by the government.
Although the government doesn’t exactly make it easy for students to understand their options when it comes to loan repayment, there is information out there. You can visit the Consumer Financial Protection Bureau’s “Repay Student Debt” tool, which helps narrow down your options for both private and federal loan repayment. There is also an exhaustive list of student loan repayment options on the Office of Federal Student Aid website.
The bottom line: If you’re having trouble paying off your student loans, there is really only one place you should be calling for help — your lender.
“Borrowers need to be in communication with their loan servicers about their options if they’re struggling,” says Yu. “Unfortunately, a lot of borrowers have paid [for debt relief services] and don’t even realize they’ve been scammed.”
If you suspect you’ve been a victim of fraud, Yu suggests asking the company for a refund and requesting that any contracts you’ve signed be canceled. Sometimes firms will have borrowers sign a contract giving them limited power of attorney, which allows the firm to communicate with lenders on the borrower’s behalf. Contact your student loan servicer to explain the situation and revoke the firm’s power of attorney. If you’ve supplied your Social Security number, then keep an eye on your credit reports through annualcreditreport.com to ensure your information has not been used to open any accounts. Finally, you can report suspected fraud activity to the CFPB (855-411-CFPB) or to the Federal Trade Commission’s online Complaint Assistant.
