Every year students borrow billions of dollars to go to college.
With $1.3 trillion in outstanding loan debt, it’s safe to say that student loans are a big business and growing.
Sadly, so are the scams.
Student Loan Scams to Avoid
The Consumer Finance Protection Bureau (CFPB), started by Elizabeth Warren, has issued multiple warnings about what to look out for when it getting help with your student loans.
What’s really out there?
Before we dive into different types of student loan scams, it’s important that we talk about getting help with your student loan debt.
Many companies which aim to help you with your loans advertise on Facebook or Google.
You may even receive a text advertising such services.
These companies might entice you to call or sign up to receive their services.
Keep this in mind:
- Federal laws set payment amounts, qualifiers, and requirements under IBR, PAYE, and other repayment programs
Of course, paying someone for help isn’t automatically a scam.
While these programs are free, signing up can be confusing for some people.
Some people do their taxes themselves while others hire a CPA and a similar choice applies to student loan debt.
However, if you pay someone to help you, you need to make sure that the company is reputable and isn’t going to rip you off.
(PRO TIP: Need a bird’s eye view of all the options available for student loan repayment? Download the 8-Plan Cheat Sheet to Student Loan Repayment for free. Click here to learn more and grab your free copy.)
Scam Warning Signs
Advanced Fees
A student loan company that tells you they can get you the “best” interest rate and loan terms if you pay a “small fee” up front is likely a scam.
The fee can be anywhere from 1-5% of the loan amount.
Sometimes the fee is a flat rate up front (i.e. $1000).
If you come across this offer, RUN!
There are no circumstances in which you should have to pay money to get money.
Legitimate student loans, even from private lenders, do not require any fees up front.
If there are any fees, the lender deducts them from the disbursement check or includes them in the repayment amount.
There are two common fees that you will likely pay with your loan but, once again, never up front.
Federal student loans charge a 1% default fee but charge no origination fees.
Most private loans charge some type of disbursement fee or origination fee, but these are usually negotiable and vary widely from lender to lender.
If you are working with a third-party company to help you with student loan debt, they might require a fee up front.
I know of a couple companies who help people who have defaulted on their loans get back on track and this is exactly how they get paid.
Loan Refinancing
If you have a private student loan, there are a number of lenders who will refinance your private loans, federal loans, or both.
Refinancing differs from consolidation in that rather than simply combining all your loans into one, you are actually taking out a separate loan with a new lender who pays off your existing loans.
In any case, it’s important to research any service you seek out to make sure they have built a good reputation in serving their customers.
Law Firm Lawsuit Student Loan Scam
This is a scam where a law firm will claim to be able to settle your student loan debt.
There are a lot of variations on this scam, but typically a “student aid company” refers a borrower to a law firm.
The student aid company promises that this law firm can settle your student loan debt for thousands less than you owe.
Many times the law firm will ask you to make your full student loan payment, or whatever you can afford, to the law firm itself.
The firm says they’ll then negotiate a settlement with your lender.
However, what typically happens is that this law firm doesn’t make any payments while negotiating with your lender, so you go into default on your student loans.
At that point, the firm will then claim you can’t pay your bills, and try to negotiate a settlement based on that.
It’s kind of how the housing crash in 2008 happened.
As evidenced by that debacle, no one ever ends up paying for their crimes, so be on your toes.
As a borrower who succumbs to one of these scams, you’ll end up with a useless credit score and you’ll be out thousands of dollars with nothing to show for it.
In the end, there is no guarantee that you will be able to settle your loans.
And even if you do, the process may take years and you’ll still have to deal with the settlement in the end.
Relief Red Flags
There are many more red flags so just remember that if something sounds too good to be true, it just may be. Other red flags to watch out for:
- A company that claims to have a relationship with the Department of Education. Third-party companies or law firms do not have any relationship with the Department of Education.
- A company that promises you a set payment or guaranteed forgiveness. Companies cannot promise forgiveness or guarantee an income-based repayment because both will change based on your income.
- Any promise of immediate loan forgiveness or cancellation.
- A promise that a buyer will buy the loan and settle it for a set amount.
- Any promise that, because your school closed or is being sued, you can definitely get forgiveness.
So who can I trust?
Like anything, you’re going to have to do a little legwork before trusting someone to handle your student loans.
If you prefer to seek out a service provider, be sure to look at their online reviews.
Do your homework and know that, although none of this may be easy, there is a solution.
(PRO TIP: Need a bird’s eye view of all the options available for student loan repayment? Download the 8-Plan Cheat Sheet to Student Loan Repayment for free. Click here to learn more and grab your free copy.)
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