With the rising cost of education, it is no surprise that college degrees are increasingly being financed by one or more federal and private loans.
According to a report published by the U.S. Department of Education, 41 million people have unpaid federal student loan debts and only 4 million borrowers have joined the income based repayment schemes that aims to reduce the burden of the borrowers.
As students desperately seek options for student loan forgiveness, many unscrupulous lenders tend to design scams that act as a honey trap and rob students of money that they could instead use for paying off their debts.
They offer to file the paperwork and consolidate the multiple federal loans into a single direct consolidation loan. While this may seem attractive, people fail to realize that they have to pay them for services that can be done for free.
Therefore the onus is on the borrowers to familiarize themselves with the various student loan forgiveness programs. This will help them to not fall into the trap carefully laid out by scammers.
The below article provides information of the various student loan scams and ways to identify such scams.
Out of the many innovative schemes used to dupe the borrowers, the below six scams are the most common.
Scammers use the advanced fee scam as a tool to harass borrowers. In this type of scam, the fraudulent company will entice you by offering the best interest rate and loan terms for your student loans in exchange of a fee. This fee can be any amount ranging from 1% to 5% of your student loan amount.
They request for the fee in order to negotiate on your behalf with the student loan lender. They try to make the deal attractive by talking about many other clients who have received similar benefit and urge you to sign up for the scheme.
Legitimate companies do not charge an upfront fee. Instead they charge a fee upon the closure of the deal and typically the money is taken from the loan amount. This means that you do not have to pay anything from your pocket.
Many people are unaware that you can receive support on your federal student loan for free from the U.S. Department of Education.
Therefore if you have been approached by any company asking for a fee upfront, it is best to avoid them as it is a trap.
This is one of the most dominantly prevalent scams today. After students graduate, they usually have multiple student loans. Therefore student loan consolidation schemes become very attractive.
Scammers use this as an opportunity to cheat borrowers by offering them services that seek to consolidate student loans for a fee. The fee may be called a consolidation fee, administrative fee or a processing fee.
Borrowers must recognize that this is a scam for the below 3 reasons:
Before making any rash decisions you must speak with the customer care representative of the loan consolidation information call center to explore the various legitimate options available to consolidate your federal student loan.
Therefore if you have received a call from any customer care personnel who offers to consolidate your student loan for fee, please hang up the call.
The possibility of having your student loan to be forgiven completely is extremely rare. You must have a strong reason such as death, permanent disability or school closure that qualifies for total federal student loan forgiveness.
Therefore if you have come across any company that offers to waive off your federal student loan completely, it is actually a scam to cheat you. These companies ask for a fee for negotiating on your behalf with you student loan lenders.
The lenders are under no legal obligation to entertain such negotiations. Hence you end up with a hole in your wallet with no results.
Therefore you must directly speak to the lenders of your student loan if you are facing any difficulty repaying you loan instead of contracting the services of a 3rd party.
In this type of scam, you will be approached by a law firm that promises to settle your student loan. The law firm is typically referred to you by a student aid company to add a touch of authenticity.
The law firm tries to entice you by promising that they will be able to settle your student loan at a price much lower than your outstanding student debt.
Usually the law firm asks the borrowers to pay the outstanding loan amount or as much as possible to the law firm who will then negotiate for settlement with your student loan lenders.
The company then dupes you by not paying any amount to the lenders and you are most likely to default on your student loan.
This will seriously damage your credit score and reduces your chances of being eligible for a loan in future. Apart from this you will also lose the money you paid to the fraudulent company.
There is no limit to the extent companies can go to gain a dollar. If any company asks for your credentials for logging into your Free Application for Federal Student Aid (FAFSA) account, then you must be very cautious as this is a scam.
Your FAFSA pin is just like a digital signature and should not be shared with anyone. Apart from this you should also beware of companies that require you to sign a power attorney document allowing them to execute your student loan accounts.
There are many fraudulent companies that disguise themselves as affiliates of the U.S. Department of Education and charge the borrowers for consultation fees.
They use logos and stationeries that look like the ones used by the federal government. This is done to allure the borrowers and fall into the trap.
Therefore it is important to investigate the credentials of any company offering services that claim to reduce your student loans.
The below warning signs will help you identify student loan scams.
It is illegal for any company to charge an upfront fee for negotiating your student loan on your behalf. If there is an origination or guarantee fee involved, then it will be cut from the disbursement check only after the loan is repaid.
It is also important to remember that international students cannot apply for federal student loans. So if any company asks you to pay a fee for submitting a loan application on your behalf, beware it is a scam!
If you are attracted by any advertisement on Facebook or late night television commercials, which claim to have the support of the federal government, you should stop right away.
They merely use the words “federal”, “Obama student loan relief plan” to make their advertisement sound genuine.
These companies are looking to make a profit by asking you to pay for consolidating your student loan or by changing your repayment plans which is something you can do on your own.
Many companies try to take undue advantage of the borrower’s desperation for seeking respite from their student loans. They promise immediate relief and complete settlement of your student loans by paying them a small percentage of the loan as consolidation fee.
No matter how good the schemes sounds you must bear in mind that student loan forgiveness is a tedious and long process which has a strict set of eligibility criteria.
So do not fall for phrases such as “get your monthly payments reduced in 1 week”, “settle your student loan instantly”. These are empty promises made by companies to gain the trust of unsuspecting borrowers.
Many companies in order to get the borrowers sign up for their schemes without any delay, play mind games with you. They will rush you to make decisions by saying the interest rates will sky rocket in the next few day or offer gifts or prizes if they close the deal on the spot.
If you are facing any kind of high pressure sale tactic, it should trigger to you that something is amiss. Smart borrowers should take their own sweet time and weigh the pros and cons of the various schemes being offered.
So if the lenders offer free gift cards, credit cards and other freebies, it is better to look away.
Identity theft is very rampant today as a growing number of transactions occur online. The federal government does not ask you to share any user id or password details with them.
The scammers may pose as affiliates of the government and request for personal details. They can use this information to log into your account and mess with your student loan.
Scammers can also use the information such as name, social security number and bank account details to illegally obtain credit cards and cell phone accounts.
Hence do not be fooled by the scammers and always remember that any legitimate website that is run by the government will have .gov in their domain name.
Despite taking all the precautionary measures, if you feel that you have been scammed, you should report it to the Consumer Financial Protection Bureau at the earliest.
You must call the three major credit bureaus Equifax, Experian, and TransUnion and freeze your account to stop any scams.
If you have divulged your FSA ID you must get in touch with the Office of the Inspector General who will advice you on the further course of action.
If you have paid an advanced fee you must call your bank and instruct them to stop the payment immediately.
Scammers look to prey on borrowers when they are most vulnerable. Borrowers who are unable to pay back their loans or people who are unaware of the loan repayment options, become victims of such scams.
It is important to always remember that only the US Department of Education can waive off or reduce your federal loan amount. You do not have to pay the government or your loan lender any fees for changing the repayment terms if applicable.
It is natural to get overwhelmed, but you should remember the below points to arm yourself with the right type of information to help you stay away from any scams.
|Consolidation Fees||Does not charge any fee||Charges an upfront fee for their services|
|Power of attorney||Does not require any power of attorney to be signed||May request you to provide them with power of attorney to help negotiate with the loan lenders on your behalf.
|User Id and password||Does not ask for sensitive private information||Request such details in the garb of helping you serve better|
|Paid advertising||Does not advertise its service on Facebook and other platforms||Uses Facebook, radio, TV commercials to attract borrowers to its schemes|
|Domain name||All government websites have .gov as part of their domain name||Companies will have email addresses from AOL, Google, Hotmail etc|
|Filling of Free Application for Federal Student Aid (FAFSA)||The FAFSA document is available for free and borrowers have to merely fill out the details and submit their application forms.||Scammers charge a fee for filling the FAFSA forms.|