Right now there is over $1.7 trillion in student loan debt. With billions of dollars being loaned to students each year, there is no doubt that there are scammers trying to get your money that are offering services that they do not follow through on, or have no real idea about.
In fact, the Consumer Finance Protection Bureau (CFPB) has even issued multiple warnings about what to look out for when it comes to getting help with your student loans. (For example, this one and this one).
Here are some common scams that are happening right now that you should be aware of when looking for student loan help. These scams are especially on the rise now that student loan repayment is set to resume, and Biden's student loan forgiveness plan was blocked by the courts. You may be worried about your loans - please don't fall victim to these student loan scams. There are lot's of ways to get help.
This article is pretty long - we cover a lot of ground here. If you're looking at a specific company, jump to our section on "Is There Any Company You Can Trust To Help You".
What You Need To Know About Student Loan Debt Help
Before we dive into different types of student loan scams, it’s important that we talk about getting help for your student loan debt.
There are a lot of companies that advertise that they can help you with your loans – you might see the ads on Facebook, on Google, or even in the mail (yes, people still get mail). And these companies might promise you things or advertise some type of help for your student loan debt which might entice you to call or sign up.
Before you take any action with these companies, remember this: you don’t ever have to pay someone to get help with your Federal student loans if you don’t want to. Not that help is not available, but it’s up to you to decide if you want to do it on your own, or hire a professional organization to handle it for you.
Here's why:
- Enrollment in repayment programs is available at no cost to Federal student loan borrowers and can be done for free at StudentAid.gov
- Debt relief companies do not have the ability to negotiate with your Federal student loan creditors in order to get you a better deal.
- Payment amounts, qualifiers, requirements under IBR, PAYE, and other repayment programs are set by Federal law
But that doesn’t automatically mean paying someone for help is a scam. While these programs are free, signing up can be confusing for some people. Or they may have complex situations and want someone to help them. Just like some people do their taxes themselves, while others hire a CPA, the same applies to student loan debt help.
You can do it yourself. Or you could pay someone to help you (if you want to see who we recommend, scroll to the bottom). However, if you pay someone to help you, you need to make sure you’re not going to be ripped off and the company is reputable.
Here are the warning signs to help you avoid student loan debt relief scams.
Advanced Fee Scam
This scam involves a student loan company that tells you they can get you the "best" interest rate and loan terms, but you have to pay a "small" fee up front for this service. The fee can be anywhere from 1-5% of the loan amount. Sometimes the fee is a flat rate up front (say $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, they are deducted from the disbursement check or they are included in the repayment amount and are amortized over the repayment period.
There are two common fees that will be paid with the 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 either 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 your student loan debt, they might take a fee up front. But this fee should go into an escrow account (or third party account) and the company should only get paid once they prove they’ve helped you sign up for a program. Look for wording like “we only get paid once you’ve made your first payment on your new repayment program”.
Note: A new variation on a theme has emerged in the last year. Instead of charging a direct advanced fee, some companies are offering a second personal loan - which is basically a fee in the format of a loan. Most borrowers who get involved in this don't realize they took out a new loan, and there are repercussions if you cancel or don't pay (such as interest and collection fees).
The bottom line is, if you use a third party company, make sure you fully understand the pricing and payment structure.
Loan Consolidation Scam
After you graduate, it might be a good idea to consolidate your student loans. This is another area that is ripe with scams. The most common student loan consolidation scam is one in which the company charges a consolidation fee, but actually does nothing. The fee is sometimes called processing fees, administrative fees, or consolidation fees.
If you have a federal student loan, there are no fees whatsoever for student loan debt consolidation. You can do it yourself for free at StudentAid.gov.
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. Credible is a comparison tool that allows you to fill out one form and see personalized offers from multiple lenders in the space. Going through any lender on the Credible platform is NOT a scam.
Plus, College Investor readers can get up to a $1,000 gift card bonus when they refinance through Credible!
Finally, if you are considering consolidation, make sure you read our guide on The Right Way To Consolidate Your Student Loans.
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 borrower is referred to a law firm by a "student aid company". 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 to the law firm itself (or whatever amount you can afford to pay). The law 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 - as such, you go into default on your student loans. At that point, the law firm will then claim you can't pay your bills, and try to negotiate a settlement based on that.
What happens to you, as the borrower, is that your credit score is trashed, and you made thousands of dollars in payments to the law firm. 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.
If you're considering speaking to a lawyer about your student loan debt, learn about what a lawyer can do for your student loans.
Student Loan Debt Elimination Scam
The important thing to remember about student loan debt is that it must always be repaid - it cannot be eliminated unless you have a federally qualifying reason (death, permanent disability, school closure, falsification of documents or identity theft). If you come across a company that promises to get your student loan debt eliminated, it is a scam!
We see these scams a lot relating to closed for-profit colleges and universities. Companies will advertise that, simply because you attended a certain college or university, you can get your student loans eliminated. This is usually false.
There are many potential student loan forgiveness programs that you can read about here. If your school closed or is facing lawsuits, you can potentially do what’s called Borrower Defense to Repayment. But if you’re paying a company for help, ask them specifically what they are doing for you.
Scam Or Bad Service?
There are times when it's not a scam, but it just seems like one because the customer service is bad or paperwork gets “lost”. For example, I get a lot of readers asking about the FedLoan Servicing Scam. FedLoan isn't a scam, but just a poorly run student loan servicing company that is looking out for their own best interest.
Student Loan Servicer is actually the code word for “Student Loan Collection Agency.” Another one I get asked a lot about is NelNet, especially when it comes to their KwikPay Service. Once again, not a scam, just a poorly run program that is incentivized by the collection of full payments.
I hope this helps you navigate the world of student loans a little better and avoid getting played. If you want to know more, don't forget to check out my Definitive Guide to Student Loan Debt.
Student Loan Relief Red Flags
Now that you know some of the main types of student loan relief scams, what are some red flags to look for?
Based on talking to consumers for several years, these themes have emerged:
- Any company that claims to have a relationship with the Department of Education (third-party companies do not have any relationship with the Department of Education)
- Any company that promises you a set payment or 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
- Any 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 an get forgiveness
- Any telemarkerter that calls you and says a president's name and "Student loan forgiveness program"
Is There Any Company You Can Trust To Help You?
Even though I’ve said countless times you can do it for free at StudentAid.gov, there are still people who’ve asked me “that’s great Robert, but I still want to pay someone to help me – who can I trust?” That’s a fair question, so who can you trust?
Next, call your student loan servicing company. I know this sounds counter-intuitive, but 80% of issues and concerns can be resolved by simply calling your loan servicer. These free options are usually your best bet for help with student loans.
If you want an app that can help you get organized, check out Chipper. This tool connects to your loans, help you change your repayment plan, and can even help you pay down your loans faster through round-ups. Read our full Chipper review here.
If you're still not quite sure where to start or what to do, consider using talking to a financial planner that specializes in student loan debt. A real financial planner with have a CFP or similar designation, AND they will have a fiduciary duty to you. We recommend the Student Loan Planner. Check out our Student Loan Planner review here.
Worried You're Being Scammed?
If you are certain that you have paid money to scammers, you may need to take immediate steps to protect your credit card or bank account.
Contact The Credit Bureaus: The first step should be a call to the three major credit bureaus - Equifax, Experian, and TransUnion. Report possible fraud and put a freeze on your credit. Student aid scammers are usually more interested in the fees, but your personal information is still at risk of misuse if it falls into the wrong hands.
Contact Your Loan Servicing Company: You need to contact your lender and tell them what happened. Ensure they change any account passwords and information, and remove any power of attorney paperwork that may have been filed on your behalf. You should also discuss with them directly the best steps to move forward with your loan repayment.
Bank Issued Stop Payment For The Fees: If the scam involves an advance fee, you can try to get your money back or prevent losing more money by contacting your bank or credit card to stop the payment. You can report the transaction as fraudulent and it should prevent you from having to pay it. This is also one of the biggest reasons why we always recommend people to use credit cards, not debit cards.
FSA ID Protection: If you gave the company your FSA ID, you need to change your password immediately. You may also want to contact the Office of the Inspector General. You may also report the business to the Consumer Financial Protection Bureau via their online complaint site or by calling 855-411-2372. If you believe you are a victim of a student loan aid scam, you can also contact the Federal Trade Commission (FTC) and file a complaint with the FTC.
File A Complaint With The CFPB: You can report the company to the Consumer Finance Protection Bureau and they might be able to investigate the claims. Chances are this might not help with your individual case, but it could shut down a real scam company. You can file a complaint here: https://www.consumerfinance.gov/complaint/
File A Complaint With Your State Attorney General: Most state attorney generals have taken an aggressive approach towards student loan repayment assistance scams. Consider contacting your state attorney general and filing a complaint with the specific information.
It's important to note that you might not get your money back. And nothing might have been done with your student loans.
Where To Get Help
The first step is to learn about your student loan options, including consolidation, repayment plans, and forgiveness. StudentAid.gov. the government’s website for student loans is one of the best resources to learn about your student loans.
Also, contact your lender - they are paid by the Department of Education to help you with your loans. They can be a great resource to help you.
If you're not quite sure where to start or what to do, consider hiring a CFA or CFP to help you with your student loans. We recommend The Student Loan Planner to help you put together a solid financial plan for your student loan debt. Check out The Student Loan Planner here.
To get free and valuable guidance about your student debt, read some of our most helpful blog posts here and check out our free Definitive Guide to Student Loan Debt to fully understand all of your options. Share your experiences and questions in the comments section below.
If you have been scammed, explore all avenues possible and report the offending company to stop them from preying on borrowers just like you who are trying to get on the right path.
Readers, have you ever been the victim of a student loan scam?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared toward anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications, including the New York Times, Wall Street Journal, Washington Post, ABC, NBC, Today, and more. He is also a regular contributor to Forbes.
Editor: Clint Proctor Reviewed by: Chris Muller
