Unemployed and drowning in student loan debt? Receiving a call from a debt relief company claiming it can help sounds like a godsend.
But is it the best option for you?
Not necessarily. The industry is riddled with fraudsters who employ shrewd tactics and charge exorbitant fees to access government programs you can participate in free of charge.
So why aren’t borrowers taking advantage of those no-cost government programs designed to offer relief? Too much ambiguity, and not enough resources to sort it all out.
According to the National Consumer Law Center, which issued a report about the student debt relief industry:
Government programs are unnecessarily complex and borrowers too often confront an impenetrable bureaucracy that prevents them from accessing their rights. To compound these problems, there are few reliable resources borrowers can turn to if they need help.
Student loan debt relief companies have appeared throughout the nation to fill the void. And their services can come at a big price to desperate consumers.
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.
A closer look at the industry
In response to an influx of complaints, New York Gov. Andrew Cuomo formed the Student Protection Unit and launched an investigation in January into fraudulent student debt relief companies.
Illinois has already taken things a step further and sued two companies. “These lawsuits are the first in the nation to crack down on an emerging industry of scam operations charging large upfront fees for bogus services or for government services that are already free of charge,” the Illinois attorney general’s website says.
The NCLC also conducted an investigation of the industry using a sample of 20 student loan debt relief companies. Here are the key findings:
- Self-help discouraged. Companies capitalize on the issues preventing borrowers from seeking relief from no-cost government programs. Instead, they offer a repackaged version for a fee.
- False credentials. Some of the companies boasted false governmental affiliations. “One of the companies we contacted told our shopper that it is an ‘approved servicer’ with the U.S. Department of Education,” the report said.
- Incorrect information. The content on a number of the company websites was either inaccurate or plagiarized.
- Fee schedule. “At a minimum, it is deceptive that most of the companies fail to prominently disclose that ‘their’ programs are actually federal government programs that an individual can access on her own at no cost,” the report said. The initial one-time fees charged were up to $1,600, and the monthly service charges ranged from $20 to $50.
- Cookie-cutter debt relief. Borrowers who use these services are typically limited to one type of relief — loan consolidation. The problem with this approach is that it doesn’t always suit the needs of the debtor, or they may not qualify.
- Sales-driven debt relief counselors. Representatives should be experienced in loan counseling, not sales. But job postings indicated otherwise. “Despite the company’s descriptions of its staff as experts, in some cases touting years of experience counseling borrowers, it appears that many advertise jobs as sales positions,” the report said.
- Questionable contractual clauses. The contracts included mandatory arbitration clauses, and borrowers were required to hand over their power of attorney.
- Violation of consumer protection laws. Among the issues mentioned were vague cancellation policies, mandatory upfront payments and inflated promises.
How to protect yourself
If you’re struggling to repay your student loans, contact your lender immediately. There’s no need to pay for a service you can do for free.
Do you suspect you’ve been victimized? Here’s what the National Consumer Law Center recommends:
- Immediately request a refund and terminate any contracts. Have the power of attorney revoked.
- Monitor your credit activity via AnnualCreditReport.com if you supplied your Social Security number.
- File a complaint with the Consumer Financial Protection Bureau or the Federal Trade Commission’s online Complaint Assistant to report any fraudulent activity.
Have you been victimized by a student debt relief scam? How did you resolve the issue? Let us know in the comments below or on our Facebook page.