Struggling student loan debtors are being tricked into paying up to $1,600 in fees to private firms offering "debt relief" that they could get for free, according to a report issued Wednesday by the National Consumer Law Center.
Student loan debt relief ads began crowding their way onto media in recent months. Consumers deep in credit card debt have heard the pitch for years, in seemingly incessant radio and late-night TV ads—call, the ads promise, and debt relief firms can make those nasty debt collectors disappear.
Now that total outstanding student loan debt has surpassed outstanding credit card debt, it's not surprising that similar deals are being hawked to former students drowning in bills they ran up to pay for college and graduate school.
Not all student loan debt relief programs are misleading, and it's unclear if any of the sales tactics used are illegal. But they should be, says the National Consumer Law Center (NCLC), because they often layer unnecessary fees onto debts held by already-struggling consumers.
"At a minimum, it is deceptive that most of the companies fail to prominently disclose that 'their' programs are actually federal government programs that an individual can access on her own at no cost," the report said.
Besides high up-front fees, the NCLC also found many of these programs charge ongoing monthly service fees—even though student loan consolidations require only a one-time process.
For its research, the consumer agency contacted 10 firms advertising student loan debt relief, with an employee acting as a "secret shopper." She posed as a single woman with $30,000 in loan debt that she could not afford on her salary as a social worker. The NCLC did not reveal the names of the companies it contacted.
One told the secret shopper that it charges a fee of 1 percent of the outstanding loan balance. Another quoted an up-front fee ranging from $499 to $1,600. Still another quoted $500, to be paid in two monthly installments. A fourth charged $295 and an ongoing $50 monthly fee.
While ads hawking the programs mention numerous options for debt relief, loan consolidation was the only tool offered to the secret shopper, said Deanne Loonin, an attorney with the NCLC who wrote the report.
Federal law already gives student loan borrowers numerous ways to reduce their loan burdens, including deferrals, forbearance, and consolidation of multiple loans to a lower rate. The process for obtaining this relief can be a little confusing, however, which opens the door for debt relief companies, the report found.
"Getting this relief … is rarely easy," the report said. "Government programs are unnecessarily complex and borrowers too often confront an impenetrable bureaucracy that prevents them from accessing their rights. To compound these problems, there are few reliable resources borrowers can turn to if they need help."
When they turn to debt relief companies, consumers are often misled because companies characterize their debt relief as unique and often don't tell consumers they are merely reselling government programs, Loonin said.
Many firms also require consumers to grant them power of attorney and forbid them from directly contacting the loan servicers—a technique that's common in the debt settlement industry. It can be disastrous to consumers who fall behind on their bills.
Loonin also said that many services her office contacted gave out bad and inaccurate advice on credit reports, bankruptcy law, loan rehabilitation, and other issues.
"There are situations where you pay someone for something you could get for free, but the companies should be transparent about what they are doing, and they should be competent about what they are doing," she said.
Ask Questions Before Signing
Consumers who consider paying for student loan relief help should ask plenty of questions before signing up, Loonin said.
"If they don't seem like they want to answer questions, that's a warning sign," she said. She also urged consumers to look for complaints against the debt relief firm at the Better Business Bureau web site or other sources.
There are plenty of resources for finding out about more about student loan relief. The Department of Education offers a page devoted to repayment strategies
There's also a simple step-by-step loan repayment advice tool at the Consumer Financial Protection Bureau.