Flickr user Michael Theis
With the ever-increasing cost of college, many students need to take out a student loan to pay for college. Looking for low-cost student loans to cover your college tuition can be a trying process. Repaying your loans with interest after graduation can be even more daunting. When you’re under that kind of stress, it’s easy to fall prey to student loan scams.
Scammers are out to make a fast buck and do so by offering you temptingly easy solutions to your problems. Unfortunately, instead of resolving anything, it just throws you further into debt.
While you think student loan scams might be easy to spot, the scammers who run them employ various approaches – all very subtle. Scammers take advantage of a student’s youth and inexperience with money, making these scams difficult to spot. In this article, we’ll highlight common student loan scams, ways to identify those scams, and what to do if you feel like you’ve fallen victim to one.
How to Identify Student Loan Scams
As with everything else, knowledge is power when it comes to avoiding student loan scams. Knowing what to look for is the key to protecting yourself. Scammers tend to capitalize on recent graduates who are just starting to pay their student loans. If any of these things happen to you, it’s likely a sign of a scam:
- Anyone asking you to pay up-front fees for services not yet rendered.
- A company suggests they’ll take control of your loan or buy out your loan.
- Someone claims to forgive all of your student loan debt.
- Anyone asking you to share personal or financial information.
- The company making these offers has a ‘barely-there’ online presence.
- The company offering you a service uses aggressive language or pressure tactics.
Let’s see how these “signs” look in some actual scams.
6 Common Student Loan Scams
1. Federal Loan Consolidation Scams
Federal loan consolidation may be a good option for your federal student loans after graduation as it allows you to combine multiple loans into a single loan with one monthly payment due date. The interest on the consolidated loan is calculated as the weighted average of the combined loan.
In this con, you may receive a phone call or email from a company promising to help you consolidate your federal student loans at a lower interest rate. If you agree to use their services, you will have to pay an upfront fee, which may be referred to as a consolidation fee or maybe a processing or administrative fee.
Federal student loans however are handled only by loan servicers specially appointed by the federal government. The federal government sets the guidelines and interest rates on these loans and loan servicers have to abide by these guidelines. They cannot increase or lower the interest rates on consolidated loans.
If you receive a call or email promising lower interest rates on federal student loan consolidation, it’s a scam. You never have to pay any upfront fees for any services related to federal student loans, whether it is loan consolidation, enrollment in income-driven-repayment plans, or loan forgiveness. If you have questions about consolidating your federal student loans, call your loan servicer. They will answer all your questions and help you sort your options for free.
2. Law Firm / Law Suit Scams
This one starts with an unsolicited telephone call or e-mail from a law firm offering to relieve you of all your student debt or negotiate some of your debt for forgiveness. The caller will typically request that you send a nominal fee or pay a percentage of what you owe to the specific law firm in question as a retainer. On receiving the retainer, the law firm promises to negotiate a lower payment or full relief for you, saving you thousands of dollars.
Some scammers may even ask you to make your entire student loan payment or whatever you can afford to the law firm in question. They claim that this will give them more leverage to negotiate with your lender and get you the best deal possible.
Don’t fall for it—it’s a scam, and an expensive one. What happens is no payment is made to your lender and there are no negotiations happening. As a result, your loan goes into default, and you now have to pay a late fee fine and interest on the unpaid amount.
3. Student Loan Debt Elimination Scam
Contrary to common misconception, student loan debt CAN be discharged through bankruptcy in certain circumstances. However, student loans can be more difficult to eliminate compared to other forms of consumer debt. There are very strict laws about what types of education loans can be discharged and under what circumstances they can be discharged. For example, you may be able to get your loan discharged if you are victims of identity theft, permanently disabled and unable to work or your school closed down.
Companies claiming to know how to skirt the rules and get your student loan debt eliminated even if you don’t qualify are a scam. Nobody can promise to discharge your loans through bankruptcy if you don’t meet the set requirements. Filing bankruptcy is a legal procedure. Trying to circumvent the law is illegal and can get you into serious trouble. Ignorance of the law is no defense.
If you think your circumstances qualify you for debt elimination, get in touch with your federal student loan servicer or private lender first. Discuss your situation with them and, if you’re unsatisfied with the interaction, only then get in touch with a legitimate law firm for help. Do your research to make sure you’re dealing with a reputable law firm and not some unknown company that reached out to you offering to help.
4. Second Loan Scam
This is a variation of the upfront payment con. The caller may offer any of the above three services at a fee. If you cannot afford to pay the advance fee, they offer you another option in the form of a personal loan. This sounds like a great solution to you – you can repay the personal loan in installments, meanwhile you’re getting the help you need to resolve your student loan issues.
Unfortunately, nothing is done to resolve your current student loan issues. And now you’re stuck with a personal loan that you did not need in the first place. You’ll find that you cannot cancel the loan and if you don’t pay the monthly repayment, you’ll have even bigger problems in the form of late fees, interest, and even collection fees.
5. Student Loan Forgiveness Scams
President Biden’s Student Loan Forgiveness was introduced to offer relief to student borrowers struggling with debt after the coronavirus pandemic. For scammers, this is just another opportunity to prey on borrowers desperate to reduce their debt.
The scammer may claim to be from the Department of Education or Federal Student Aid (FSA) and may even know details about your loan. They’ll convince you that you are eligible for forgiveness and encourage you to rush and submit your application as soon as possible. Or you could give them your FSA ID login details and they’ll complete the formalities for you. They’ll even follow up your application and make sure you get maximum loan forgiveness.
This is definitely a con. Nobody from the federal government will contact you personally and pressure you to sign up for anything. On the contrary, all federal and private lending institutions constantly advise their clients not to share their log in details with anyone claiming to be from the company. If you have questions about federal student loan forgiveness, ask your federal loan servicer. Also check StudentAid.gov regularly. They post the latest updates on forgiveness.
6. Power Of Attorney Scam
A Power Of Attorney Agreement is a legal document that a person signs authorizing another individual to take action on their behalf. Many scammers use this angle to cheat students looking for loans. They ask you to sign a power of attorney that allows them to negotiate a loan on your behalf. Getting somebody else to do all the paperwork sounds so good. It saves you all that time and hassle. Unfortunately, this is just another way to separate you from your money.
Never give anybody else blanket authority over your finances. Be even more careful when giving power of attorney to somebody you don’t know.
When it comes to receiving unsolicited emails offering to help, if it seems too good to be true, it could be. If you need help or have questions, go straight to the source, and get the clarifications you need.
How to Protect Yourself From Student Loan Scams
- Be cautious with unsolicited queries or offers. While these could be legitimate marketing strategies, it doesn’t hurt to call your bank and ask them to confirm the legitimacy of unsolicited phone calls or emails offering to loan you money or help you with resolving outstanding loans.
- Never share sensitive personal information. No matter what the unsolicited caller promises, do not share your personal or financial information with them.
- Never pay upfront fees for resolving any loan issues. No legitimate lender will ask you for upfront fees, whether it’s to approve you for a loan or to help you score a lower interest rate. What you may have to pay the lender is an administration or origination fee, but that’s only AFTER your loan application is approved, never upfront.
- Do not pay for loan-related help. You can get any help you need for free from the servicer that holds your loan.
- Keep your FSA ID login information only to yourself. No one from the Department of Education will ask you for these details.
- Ensure the email sender on any email is legit before you click. Clicking links sent from scammers can lead you to a malicious website and compromise your computer.
- Use strong passwords for all financial accounts: Use different passwords for different accounts. CISA offers simple, effective tips for creating strong passwords that will protect your accounts from hackers.
Think You’ve Been Scammed?
Unfortunately, student loan scams happen. Despite all the precautions, you could still become a victim of a student loan scam. If you think your account has been compromised, these are some things you should do, the sooner the better.
- For federal student loans, call your loan servicer and inform them. Log into your FSA ID account to get your loan servicer’s name and contact details. You can also find the list of federal loan servicers and their contact information on the StudentAid.gov website.
- Also submit a complaint at the gov/feedback-center for complaints related to federal student loans.
- For private student loans, call your lender immediately. You’ll find their contact information on the loan agreement.
- If your bank account or credit card has been compromised, notify your bank or credit card company immediately and ask them to stop all payments.
- File a complaint with the Consumer Financial Protection Bureau.
- File a complaint with the Federal Trade Commission.
Falling for a scam can be the start of an ongoing financial nightmare. Take some time to learn how to recognize student loans and how to protect yourself against them. It will save you from a lot of heartache and is time well spent.
Listen to your gut. If you feel something isn’t right, scratch them off your list and check out other lenders. There are several reputable lenders that will go out of their way to help you. Take your time and only deal with one that ticks all your boxes and that you’re comfortable with.
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