Nine percent of student loan borrowers have used debt-relief companies, according to a recent survey by borrower advocacy group Student Debt Crisis and personal finance website NerdWallet.
Consumers who used student loan debt-relief services paid an average of $613 for income-based repayment plans and loan consolidation that they could receive at no cost from the federal government, the survey found. Sixty-five percent said the services did not improve their financial situation, according to the survey.
Sixty percent of the 6,363 borrowers surveyed had seen advertisements for student debt-relief firms and 44 percent were pitched directly by the companies. Among borrowers who had seen ads for student debt relief, more than two-thirds were familiar with "Obama's New Loan Forgiveness Program."
It's no wonder why student debt relief companies are appealing to borrowers. Americans collectively owe nearly $1.3 trillion in student loans, more than any other type of consumer debt except mortgages.
Student debt-relief companies provide document preparation services for borrowers. These companies run into legal trouble when they pressure borrowers to pay fees upfront, claim they can negotiate immediate loan forgiveness or lower payments from the federal government, and request "power of attorney" to access borrowers' accounts with the Department of Education.
Regulators have taken action against such companies. The Consumer Finance Protection Bureau has shut down three companies and the Department of Education has sent cease-and-desist letters to five this year.
State attorneys general in Florida, Illinois, Massachusetts and Washington have filed complaints against student debt relief companies in the past year, and officials in California, Kentucky and Minnesota have warned consumers about student debt-relief scams.
"These are fly-by-night companies, you shut down down one and five more pop up," said Natalia Abrams, executive director of Student Debt Crisis, a borrower advocacy group.