Beware the student-debt-relief industry

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(MoneyWatch) As growth in student debt continues unabated, it is no surprise that a student-debt-relief industry has sprung up to take advantage of a business opportunity.

A new report from the National Consumer Law Center calls into serious question just how helpful these debt-relief services are. The center discovered many questionable practices in the industry, including charging clients fees for enrolling them in free federal loan repayment programs. The center called the practice deceptive.

For its research, the center placed secret shopper calls to 10 debt-relief companies and analyzed their websites. The investigation discovered numerous disturbing practices, including the following:

1. High fees for free service. The investigation found companies charging a range of expenses, including initial fees of up to $1,600 to enroll clients in free federal student loan repayment programs. Among the federal programs were the Income-Based Repayment Plan and the newer Pay As You Earn Repayment Plan.

Some firms also charged monthly fees of $20 to $50, which the center found curious, since the sole responsibility for borrowers in these federal programs post-enrollment is to make loan payments.

2. Dearth of fee information. In the secret shopper calls, none of the companies disclosed their fees, and there was no mention of them on their websites.

3. Claiming broad services. While firms said they offered a broad array of services, the investigators found that most of the representatives they spoke to acknowledged that their lone service was loan consolidation.

4. Providing misleading and inaccurate information. The report highlighted a "shocking number of inaccuracies about consolidation, garnishment, rehabilitation, bankruptcy and other critical topics."

The websites of three companies, for instance, incorrectly stated that bankruptcy cannot be discharged because of a 2005 law. Another said that borrowers could discharge a student loan in bankruptcy after seven years, which hasn't been true since 1998.

A few companies used logos that suggested an affiliation with the federal government. One company told the shopper that it was an "approved servicer" with the U.S. Department of Education, which was not true.

5. Focusing on sales, not counseling. The center's report suggested that student-debt-relief firms tended to focus more on selling their services than on counseling their clients. It appears that many of these firms advertise their job openings as sales positions.

6. Requiring powers of attorney. It's frightening to think of students' handing their power of attorney to these questionable companies. 

Given the many disturbing misrepresentations the law center uncovered, the report observed that it's doubtful that these companies are providing valuable services. It's more likely, the report concluded, that the "practices compound the pain of vulnerable consumers seeking to find resolutions to difficult student debt problems."