Out of all the things I've encountered in running a personal finance site and helping people tackle their student loan debt, one of the most frustrating is hearing stories of readers who have been charged outrageous fees or have had money stolen from them by student loan scammers.
Americans currently hold over $1.3 trillion in student loan debt, and the average student loan balance for borrowers has grown from $20,00 to $34,000 in just ten years, according to an April study by the Federal Reserve Bank of New York.
While most people see this as a major problem, the unfortunate reality is that others see it as an opportunity to make or steal money from good, hard-working people.
Fortunately, there are ways that you can spot student loan scammers from a mile away and avoid the headache altogether.
Before we go on, it is important to understand that there are legitimate consolidation companies and loan forgiveness programs out there.
Consolidation is always free through the Department of Education (which we will discuss below). Always. However, there are companies out there that offer to handle the process for you as a service.
If you are someone that doesn't have time to fill out your own application or feel overwhelmed by the process, there are legitimate companies that will complete the Department of Education paperwork for you while charging an application fee.
What's the difference between student loan consolidation and forgiveness, and do you need either one?
Many student loan holders mistakenly mix these two terms up, but they have very distinct implications for your student loans. Let's start by defining the two below:
Student Loan Consolidation
This is the process of combining all of your existing student loans together into a larger loan with one payment. Your interest rate will be the average of all the loans included in the consolidation. Consolidations are available for most types of federal student loans, and many private lenders offer consolidation options as well.
Federal Student Loan Forgiveness
This is the process of having your remaining student loan balance erased after a specific amount of time and regular loan payments while working in a particular field specified by the Department of Education.
The most common programs are the Public Student Loan Forgiveness program (often called the "Obama Student Loan Forgiveness program”) and the Teacher Loan Forgiveness program.
Federal student loan forgiveness programs are designed to entice student loan borrowers to work in areas of high need and in government jobs that may not be as desirable as public sector jobs.
Common types of student loan scams and how to identify them
The most important thing to understand about student loan scammers is that they are trying to prey on borrowers who are desperate and feel trapped by their debt. Typically, consolidation and forgiveness scams center around being able to provide instant "relief" for borrowers.
Here's the reality—nothing is fast about either one of these processes. If you ever come into contact with a suspicious company that wants to provide an instant solution for your student loans, walk away and don't look back.
Student loan forgiveness programs can take as long as ten years and require 120 consecutive payments. Consolidation typically takes anywhere from 30–90 days.
If it says instant, it's probably a scam.
Fake government seals
In an effort to build trust with potential scam victims or just flat-out confuse them, it's very common for student loan scam companies to include seals in their company logo that look very similar to a government seal.
Another trick they use is to create website URLs with a .us at the end or "federal" somewhere in their company name.
While it can be tricky to wade through what is legitimate and what isn't on the internet, here are a few things to note:
- If the site you are looking at seems like it could be a federal website, but you aren't sure, look for fine print. You'll usually be able to find language that explicitly states that the company is not a federal entity or related to the government in any way.
- If the website looks like a federal entity but doesn't have a ".gov" domain name, it's probably a scam. ".gov" domains are extremely hard to receive and require special applications and an approval process.
- If they are charging money, they aren't a federal entity. Again, consolidation and forgiveness programs are always free through the Department of Education.
While this doesn't always mean that the company in question is a scammer, it does mean that the fees they will charge for filling out consolidation paperwork for you could be exorbitant (Google ads aren't cheap on highly competitive terms like "student loan consolidation companies”).
It's important to remember that Federal entities do not advertise consolidation or forgiveness programs on any of the major search engines like Google or Bing.
Auto calls or texting
This approach has been around for a few years, but in the past six months or so has ramped up tremendously. You may get a phone call or text that says your loans have been "flagged for forgiveness" and that you need to call right away to take advantage of the opportunity.
I get these messages all the time, and I paid off my student loans years ago.
Most likely, the company contacting you is doing it illegally. The goal is either to charge you a crazy fee, get your money, and then disappear—OR to steal private information from you like your social security number or bank account information.
The government will not call or text you about "flagged" student loans. Never give your personal information to anyone that contacts you about your student loans without digging deeper and researching first.
Where to go for legitimate information on student loan forgiveness and consolidation?
If you don't get anything else out of this article, please remember this:
The federal government does not, has not, and will not charge you to apply for student loan consolidation or loan forgiveness programs. The best source for official consolidation and forgiveness information is always the Department of Education's website, Studentaid.ed.gov.
The Department of Education’s website is packed with useful information about the various student loan forgiveness programs, consolidation forms, and even a page to report scams and fraudulent activity here.
If you're ever in a desperate situation with your student loans, don't panic, and be skeptical of any offers for quick help. It may take time and probably won't be an easy process, but there are always legitimate ways to get your debt under control without giving out your personal information or large sums of money.
-- Bobby Hoyt is a former high school teacher who paid off $40,000 of student loan debt in a year and a half. He now runs the personal finance site MillennialMoneyMan.com full-time, and has been seen on CNBC, Forbes, Business Insider, Reuters, Marketwatch, and many other major publications.