Avoiding Loan Consolidation Scams

By | March 14, 2017
Avoiding Loan Consolidation Scams

With record amounts of student loan debt, it’s the second most prevalent form of household debt, it might not come as a surprise that there are also a fair amount of consolidation scams. If you are struggling to make your current monthly payment, any repayment option that claims to lower your payment & costs might sound appealing. Although, you should judge each offer with a grain of salt and become aware of today’s common scams to avoid becoming the next victim of student loan fraud.

Scam #1: Student Loan Debt Relief Companies Claim To Reduce Monthly Payment (& Don’t)

Somehow or another, you have received a letter, e-mail, or phone call from a student loan debt relief company. Perhaps they are locally based and primarily cater to borrowers in your state or have a national presence. The bad debt relief companies usually share some similar traits,

  • Charge you a fee to lower your monthly payment and never do or less than advertised
  • Company goes out of business several months after collecting payment without returning money

How Do TheyDo It?

This is a nationwide scam and three Florida-based companies recently were shut down by the Federal Trade Commission (FTC) after scamming borrowers out of $2.4 million for false services. Illegitimate companies will normally promise to reduce your payment by 50 to 70% after paying a monthly fee of approximately $300 for up to 3 years, plus an initial $250 fee, to “audit” your student loans and help improve your credit simultaneously.

Solution

Essentially you should be leery of any company that asks for an initial payment or high monthly payment. You should also check the Better Business Bureau ratings of a company as well.

Scam #2: Pay a Company to Consolidate You Federal Loans

A second scam is when a company will offer to consolidate your federal loans for a small fee. In reality, you can do this for free on the U.S. Department of Education website to start the consolidation process and choose a loan servicer as you advance through the process.

Solution

Start the federal consolidation process through the DoE website to ensure you are not being scammed. If you decide to use a private lender, make sure they do not charge an origination or application fee. The companies that do charge fees might be honest & legitimate, but, since the application process doesn’t cost a dime through the Department of Education, it shouldn’t cost anymore if you decide to use a private lender either.

Scam #3: Companies Claim to Work on Behalf of Department of Education

Another scam is that companies will call you “on behalf of the Department of Education” to see if you want to consolidate. This is almost always a scam as the DoE will send all official correspondence by mail, not via telephone, and the information can also be accessed at StudentLoans.gov.

Solution

Only use companies listed on the Department of Education website. Access their websites through the DoE or only call the phone numbers listed instead of exchanging information through a random phone call or flyer you received in the mail.

Scam #4: Companies Offer to Make Monthly Payment on Your Behalf

This offer is similar to the first scam listed in this article. A company will tell you to send them your monthly payment instead of sending it to your current federal loan servicer. What they do is keep the payment and you get stuck with a damaged credit score and late fees.

Solution

You only start sending your monthly payment when you actually consolidate or refinance your student loans. In this instance, your new lender “buys” your old loan from the original federal borrower and issues you a new loan that will appear on your credit report.

Either begin the consolidation process at StudentLoans.gov or use a trusted private lender that will not charge you any fees.

Scam #5: Companies Tell You to Temporarily Stop Making Payments

One final scam is that a company will tell you to stop making payments. They might say that they are putting your loans into forbearance status, which is a legal federal benefit that can be exercised during times of hardship. Forbearance suspends monthly payments for a temporary period of time, but, interest will still accrue.

If your new servicing companytells you to quit making payments for a stretch of time, find out why. You always need to make the minimum payment at least, even if it’s only the monthly interest. Companies might use this tactic and charge a higher fee once you begin making payments again. Of course, that fee will be higher than the normal late fee because they are pocketing the difference.

Solution

If you are struggling to afford your current monthly payment, contact the Department of Education or your current loan servicer directly to see what options are available. They will provide these services for free. You never have to use a third-party agency to initiate a forbearance or deferment application that charge a fee in order to “help” you.

Summary

If you want to consolidate your loans, the best place to start is directly on the StudentLoans.gov website. The application process is free and takes 20 minutes. Finally, any company that claims they can help you for a small fee is probably a scam.

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