Recognizing and Avoiding Common Student Loan Scams
Student loans can be a lifesaver for those pursuing higher education, but they are not without risks. In addition to legitimate loan programs, scammers are often active, taking advantage of students and recent graduates. It's essential to understand the difference between a scam and a bad deal. While a bad deal may leave you unsatisfied, with a scam, you have the right to legally complain. Here, we will explore some of the most common student loan scams to help you stay informed and protected.
The Differences Between a Scam and a Bad Deal
First, it's important to understand the difference between a scam and a bad deal. A scam occurs when a company promises to provide a service or product but either doesn't deliver or only partially delivers. A bad deal is when a company is upfront about its services and meets all regulations but doesn't help as much as expected or costs more than anticipated. With a bad deal, there's little you can do legally; with a scam, you have the right to complain.
The Most Common Student Loan Scams
The Upfront Fee Scam
In this scam, a company promises to get you a loan with the best terms but requires you to pay a fee in advance—usually around 1% to 5% of your loan amount or a flat fee. This is highly suspicious, as legitimate lenders do not charge fees before providing their services. When applying for a private student loan, there should never be an upfront fee. Lenders should only charge origination or application fees, and these should be placed in an escrow account until you receive your funds.
The Debt Elimination Scam
Scammers often claim to eliminate or reduce your student debt for a fee. You might find these offers through internet searches or letters or emails. However, these offers are not legitimate. Real student loan forgiveness programs are based on income or career, and there are no private student loan forgiveness programs. If you need debt forgiveness, it's safer to contact the federal government or your student loan servicer directly for options rather than relying on an outside source.
The Loan Consolidation Scam
In this scam, a company charges you a fee to consolidate your student debt after you graduate, sometimes called a consolidation processing or administrative fee, but does nothing. Federal loan consolidation is free, so you should never pay for this service. If you want to consolidate private student debt, you need to apply for student loan refinancing, which often offers consolidation. The process is similar to any other loan, and you should not pay any upfront fees. Many student loan refinancing providers do not charge fees at all.
The Law Firm Student Aid Company Scam
This scam involves law firms, typically calling themselves "student aid companies," claiming they will negotiate your student debt down for a fee that can be thousands of dollars. They often ask you to sign a power of attorney agreement to hand over control of your loan repayment accounts, and your loan can go into default while they negotiate. It's sketchy because federal student loan debt is non-negotiable, and private student loan debt may not be guaranteed. Many of these law firms use the money you give them to fill their pockets instead of negotiating your debt. Legitimate companies perform services you can do yourself for free, like making repayments.
8 Red Flags to Look Out For
Need help with your student loans but want to avoid getting scammed? Here are some warning signs to watch out for:
Fees before you get your loan: Any company that charges a fee before providing at least part of the service you're expecting is likely not legitimate.
Fees for something that's free: If a company claims to help you fill out your FAFSA forms, consolidate your federal loans, or renegotiate your federal loan repayment plan, it's probably trying to scam you.
Promises of loan forgiveness: Federal forgiveness programs are based on employment history, and there are no private student loan forgiveness programs. Debt relief companies may promise to negotiate part of your loan down, but this typically involves defaulting and is not guaranteed to work.
Lack of information online: If you can't find information about a company from their website or anywhere else, you might not be dealing with a legitimate business.
Pressure to sign up: Stay away from companies that pressure you into signing up for their services or otherwise try to coerce you into giving them money. This tactic is common with unsolicited phone calls.
Requests for login credentials or Social Security number: No legitimate student loan assistance company will ask you for either of these. Fake debt relief companies use them to lock you out of your accounts and ask for payments.
You have to sign a power of attorney agreement: This allows a law firm to take over your account and request that you make your repayments through them, which they may or may not.
Questions about your personal background: While some companies may ask for basic information, if they start asking for overly personal details, it’s a red flag.
By understanding the difference between a scam and a bad deal and being aware of these warning signs, you can protect yourself from falling victim to these common student loan scams. Stay informed and stay vigilant!