Student loan scams: How to identify and avoid them
How to avoid student loan scams
- Many student loan scams charge you money for a service that you could easily do yourself.
- Student loan scams often concern debt consolidation or refinancing; federal loan consolidation can be done for free online.
- Never trust a company that asks for money up-front or claims to be associated with the government.
- If you think you were scammed, contact your credit card company to freeze payment and report the scam to a credit bureau.
“I’ve come into an inheritance of $10 million and need your help transferring the money!” You’ve probably received at least one e-mail like this that you deleted with a chuckle. But not all scams are so transparent, particularly when you’re emotionally involved in the topic, such as student loans.
Collective outstanding student loan debt in the U.S. is close to $1.2 trillion, according to the Consumer Financial Protection Bureau, and some 7 million student loan borrowers are in default. Moreover, the average 2016 graduate carries about $38,000 in debt, according to the Better Business Bureau. With such pervasive student loan debt, scammers have found it easier than ever to trick frantic borrowers into spending even more money in an attempt to ease their loan burden.
Student loan scams
There are two types of student loan scams: companies that take illegal action to deceive borrowers into spending money with them, and companies that perform a legitimate service, though for a process that you could do on your own for free. The first should be avoided at all costs, and the latter assessed carefully alongside your financial situation. Like changing the oil in your car, you could do it yourself but you might find it worthwhile to hire a professional. When it comes to student loans, however, more often than not it is simpler to manage them yourself, for free.
Student loan scams often concern debt consolidation or refinancing. Federal student loans can be consolidated without cost through the U.S. Department of Education Federal Student Aid website to retain various federal benefits such as income-based repayment or loan forgiveness programs. Both federal and private student loans can be consolidated or refinanced through a legitimate private lender for cost savings, but any federal protections will be forfeit.
Identifying a scam
The eight common signs of a student loan scam include:
- Seeking up-front funds. According to Federal Trade Commission laws, it is illegal for debt relief providers to ask for money up front. They must provide the service before accepting any payment.
- Associating themselves with the government. Avoid any organization that charges you money while claiming to be part of the U.S. Department of Labor, U.S. Department of Education or the nonexistent “Obama Loan Forgiveness Program.” Remember that government organizations will never advertise or solicit money from borrowers.
- Social media, television or radio advertisements. Advertisements are a tip-off that you’re dealing with profit-seeking companies. While some legitimate companies will advertise, beware of commercials for programs that claim to be associated with the government or those that will “forgive” all your debt. Many scams pay to rank high on Google search results as well to bait borrowers.
- Time-sensitive deals. Be skeptical of companies telling you to “act now” before a deadline. As long as you are making your monthly payments to your lender or loan servicer, there is no rush to change your loan arrangement.
- Absolute or extreme language. Advertisements with claims such as “guaranteed,” “instant” or “complete loan discharge” are most likely scams. Your student loans cannot be erased — unless you qualify for federal loan forgiveness programs — and any prequalification or preapprovals will only come after an application and review from a lender.
- Asking for personal details on the phone. Any company seeking your credit card number, social security number, Free Application for Federal Student Aid (FAFSA) or National Student Loan Data System (NSLDS) identification number over the phone is not to be trusted. Legitimate lenders will ask for a written application, and will not require your FAFSA or NSLDS information.
- Companies that tell you to avoid your loan servicer. Your loan servicer is the first organization you should call for information on your loan management options. Companies that tell you not to contact them or that they can negotiate on your behalf are most likely scams. Beware as well of companies that call you claiming to be your student loan servicer. Ask for verification or hang up and return the call through their official phone line to make sure you are speaking with the correct organization.
- Extremely high fees. Always compare lenders and their rates to ensure that you are getting the best loan conditions you are eligible for.
Free advice abounds
Your loan servicer is an important source of information. It is always free to ask them for advice on your consolidation or refinance options and how they will affect your interest rates and repayment schedules.
There are also several online and community resources available for free student loan management advice. You can find financial aid and scholarship information through the U.S. Department of Education’s Federal Student Aid Information Center and the U.S. Department of Labor’s scholarship search. High school counselors, college financial aid offices and community centers often provide seminars or staff who can help walk you through your available options, for free.
If you do decide to hire a company to help you consolidate your federal loans or refinance your loans through a private lender, shop around and read reviews to find a trustworthy company.
If you think you’ve fallen prey to a student loan scam, there are steps you can take to try to escape it.
- Call your bank or credit card company to try to freeze any payments you might have made. You are not guaranteed to get your money back, but might be able to halt any pending charges.
- Call the organization to cancel the service immediately, including all monthly fees and upfront charges. They may or may not comply with your request.
- Call all three credit bureaus – TransUnion, Equifax and Experian – to report the scam and put a freeze on your credit.
- Contact the Federal Trade Commission or Consumer Financial Protection Bureau to report the fraudulent company.