Imagine charging someone for “debt relief,” when all you’re doing is filling out government forms. That’s what has been going on for years when it comes to college loans. And it’s classic financial exploitation.
Desperate borrowers go to websites claiming loan “forgiveness” and often get charged for free government services. It’s clearly a swindle, but federal regulators have been slow to shut it down.
When I started looking at these firms more than two years ago, I noticed that they would always pop up first in online searches for student loans. But none of them were legitimate government sites run by the U.S. Department of Education, which can help you consolidate or change loan repayment plans for free.
Although regulators have known about these firms for years, an estimated 200 companies continue to exploit borrowers. It’s not known how many Americans they’ve fleeced.
“It’s very fair to say tens of thousands -- but it’s probably more like hundreds of thousands of borrowers -- who have been taken advantage of,” Natalia Abrams, executive director of Student Debt Crisis, a national borrowers’ advocacy group, said.
Abrams and her group have called on federal regulators to “issue cease and desist letters on a consistent basis, create policies that increase borrower awareness and education, protect borrowers from scams, and use their enforcement tools to shut down companies that are found guilty of misleading borrowers and violating federal law.”
In a 2013 report, the National Consumer Law Center was one of the first groups to identify the practices of the relief outfits. It found that the companies employed aggressive sales practices and gave out inaccurate information, often “improperly claiming government affiliation.” The problem has not gone away.
“Companies charging for student loan debt relief, forgiveness and consolidation are pervasive,” according to a recent survey by NerdWallet and Student Debt Crisis. The survey found that some “60% of respondents say they’ve seen advertisements for such companies and 44% say a company has contacted them directly.”
Many of the college loan operators took their playbook from the mortgage “relief” scamsters who emerged after the 2008 meltdown. Their modus operandi was simple: Promise customers that their loan payments would be reduced or forgiven in exchange for large upfront or monthly fees, an illegal practice under Federal Trade Commission rules.
One of the leading watchdogs in the fight against college loan relief outfits, ironically, isn’t even in Washington. It’s Illinois Attorney General Lisa Madigan, who has sued eight of these firms.
While the FTC, Consumer Financial Protection Bureau (CFPB) and other state attorneys general have attempted to shut down the most egregious players in this industry one at a time, there has been a void where strong regulation should be. Broad enforcement is sorely lacking while the CFPB continues to probe these exploitative practices.
The larger question is: If the government provides free services to cut your loan repayment bill, why aren’t millions of borrowers getting that message?
One answer is that student loans are handled like a scene out of a Marx Brothers movie. Although the loan funds typically come from the federal government, repayments are handled by independent, for-profit servicing companies, which are poorly supervised on service, counseling and performance. Then private online companies emerged in recent years to exploit this bureaucratic disconnect.
Although most borrowers should be clearly informed about their repayment options before they even get into debt, they’re on their own and aren’t counseled on the best repayment plan -- of which the federal progam alone has nine. Communication between the government and borrowers is generally awful. You get more product disclosure buying a candy bar.
While the Department of Education said it’s overhauling its loan program and the Obama Administration has actively pushed reforms, they can’t come soon enough. Some 43 million borrowers aren’t getting the information they need. Most don’t even know better loan repayment options exist.
About half of federal loan borrowers qualify for income-based repayment plans, according to a report last year by the Government Accountability Office. Yet only 13 percent were participating in this flexible program, which allows you to lower or raise your repayments depending upon your post-graduation salary.
How can you protect yourself against relief scams? First, spend some time with the myriad resources from the Department of Education. I know they’re not easy to digest, but they list all of the repayment and consolidation options and tell you how to apply for them.
Another resource is your loan servicing company. Although these firms -- the ones you send your loan payments to -- have been long criticized for not aiding borrowers in lowering their payments, they must supply you with the information you need to consolidate or change your payment plan.
If you’re just eyeing future college bills, do the math and see how much you’ll owe in monthly payments. You can go online and check out a repayment calculator. Also keep in mind that private lenders are less flexible and offer only a few repayment options.
With each option, remember you shouldn’t pay anything for these services. You can do it all yourself. But until the Department of Education gets its act together to regulate with authority, you may need a Ph.D. in patience to deal with the system.