Debt relief companies sell debt-relief services that consumers can do themselves for free
Almost everyone has to take out a loan at some point, and many do so with the admirable goal of continuing their education. If you fall into this category—or if you have just graduated and are now wondering how best to pay back your student loans—make sure to avoid loan forgiveness scams so you won't fall further into debt.
The first thing you should know is that there is no such thing as easy debt relief. Although you do have options when you have trouble making your payments on time, it is best to avoid debt relief companies that promise quick and easy relief. Millions of people struggle to repay student loans, and those companies know it.
So what do they do? They offer programs and services to help reduce your debt…for a fee.
The problem is that the services they offer are often steps that you can take yourself at absolutely no cost.
Not all such offers are illegal. As Mark Kantrowitz, publisher and vice president of strategy for Cappex.com, notes, it is not against the law to charge someone for a service that that person could have performed on their own.
"These scams, which take advantage of the borrower's lack of awareness of their options, only become illegal when they charge a fee before providing the service or make false claims when promoting their services," he says.
According to Robert Farrington, who founded TheCollegeInvestor.com, there are several different ways in which these types of companies make money off of people who are having trouble repaying student loans.
One way is by charging a fee for loan modification services, which change the terms of the loan so that the borrower has a more affordable repayment amount. Another way is to charge for services that are either not done correctly or not done at all, says Farrington. And some companies falsely claim to have a special relationship with the Department of Education that makes them able to help borrowers reduce their debt.
One scam that such companies sometimes pull is to request that borrowers make their payments directly to the company instead of to the actual lender. Sometimes the payment money is never sent to the lender, and the "missed" payment goes onto the borrower's credit report.
If you're looking for debt relief help, make sure you have realistic expectations. Financial planner Justin Chidester notes that whenever a company makes dramatic claims about how well they can reduce debt, "they usually just take your money and disappear."
Companies offering to help reduce your student loan debt but really intending to scam you often give off several warning signs. Such red flags include:
- Requesting upfront fees before actually performing any services
- Claiming to be able to forgive debts or negotiate special deals for you
- Asking you to sign a so-called "third-party authorization" or "power of attorney" document to get your permission for them to negotiate with loan servicers and make decisions for you
- Asking you to give them your Federal Student Aid PIN. This is an ID provided by the Department of Education to allow you—or anyone to whom you give the PIN—access to your federal student loan information. This allows third parties to make decisions for you.
Real Help Is Out There
Paying off student loans is a real problem for millions of people. According to the Consumer Financial Protection Bureau (FPB), the volume of outstanding federal student loan debt more than doubled in less than 10 years, rising from $516 billion in 2007 to more than $1.2 trillion in 2015.
And that's not the only problem. In some instances, student loan servicers do not do their jobs. The Washington Post reported in 2015 about thousands of students submitting complaints to the CFPB about servicers who provided them with inconsistent loan information, lost their paperwork, or charged them surprise fees. Cases like these can lead frustrated borrowers to go to debt reduction companies in the hope of getting help.
However, there are better options out there. Borrowers who take out a federal student loan can choose among several different repayment plans that can lower the amount of their monthly payment based on their income. These loans also include options for deferment (delaying repayment of both the principal balance and the interest on the loan), forbearance (delaying repayment of just the principal balance), and in some cases even actual forgiveness of the loan.
Private student loans do not offer as many protections, but they are not hopeless. Borrowers should still contact the lender to ask about refinancing the loan or adjusting the payment schedule.
Remember, the best way to make sure you don't run into any loan problems is to understand the repayment terms before borrowing. Read the loan contract carefully, and if there is anything at all that you don't understand, don't be embarrassed to ask about it.