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Are student debt-relief services worth the money?

A recent report shows that college students are graduating with historically high levels of debt. Student borrowers who graduated with a bachelor’s degree in 2012, left with average student loan debt of $29,400.

Indeed, since 2008 student debt loads have increased by 6 percent every year. Meanwhile, the number of students who have to borrow simply to attend college continues to climb: 71 percent of college graduates in the class of 2012 borrowed money for college, according to the Project on Student Debt, a nonprofit research group focused on college affordability. According to federal statistics, 37 million Americans have outstanding federal loans.

As more students rack up debt, it's perhaps not surprising then that some companies are trying to make a buck off of borrowers. Across the country, student debt relief services are promising individuals that they can help them save money by restructuring their debt.

The problem is that what debt relief services are selling can typically be had for free through federal student repayment plans.

Student loan advocates are taking notice of these controversial services. New York Gov. Andrew Cuomo recently announced the creation of a Student Protection Unit to serve as a consumer watchdog for student borrowers.  The consumer unit has already served subpoenas on 13 student debt relief providers, who have allegedly charged borrowers high enrollment fees for services that are free through the U.S. Department of Education.  

Last summer, the National Consumer Law Center released a report that documented problems with student debt relief companies. They include companies charging exorbitant fees, mischaracterizing government programs as their own or improperly claiming government affiliations. They also discourage borrowers from handling their own cases.

Borrowers who are struggling with their federal loan payments should explore whether they qualify for one of the federal repayment plans. The newest plan, which is called Pay As You Earn, allows borrowers to make monthly payments that represent no more than 10 percent of their discretionary income. Essentially what these federal programs offer is a way for eligible students to repay their federal loans based on what they earn, rather than what they owe.

These federal repayment plans represent a safety-net for borrowers who are underemployed or unemployed. For reasons that aren't entirely clear, though, only 2.5 million Americans are taking advantage of the plans.

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