If you have student loans, you may have seen advertisements online touting "Obama's New Loan Forgiveness Program."
Companies using these advertisements offer to help borrowers — for a fee — apply for the government program to lower monthly payments and consolidate their federal student loans.
The problem is that the program doesn't exist. Companies are charging unaware borrowers for assistance that they can receive for free on federal student loans from the Department of Education.
"There's no such thing as 'Obama student loan forgiveness,'" said Andy Josuweit, co-founder and CEO of Student Loan Hero, a website that provides free tools to help borrowers manage their debts.
Regulator action
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.
Repayment plans
Though the "Obama's New Loan Forgiveness Program" ads are fake, the administration did expand repayment options for federal student-loan borrowers.
In 2012, the Department of Education offered the pay-as-you-earn plan that reduced monthly payments to 10 percent of a borrower's discretionary income, which was lower than the 15 percent required under the original income-based repayment plan.
Last October, the administration rolled out the revised-pay-as-you-earn plan, which gave more than 1.6 million borrowers more affordable loan options.
The percentage of borrowers enrolled in income-based repayment plans has quadrupled over the past four years from 5 percent in 2012 to roughly 20 percent in 2016.
Room for improvement
The Department of Education offers four income-driven plans for federal student loans.
To enroll in a federal repayment plan, borrowers must complete an application from their loan servicer or online at StudentLoans.gov to verify their income. Borrowers also must renew their application every year they participate in a repayment plan.
The process could be easier on borrowers, said Student Loan Hero's Josuwiet. Just as people hire tax preparers and accountants to file their income tax returns, some borrowers need help with their repayment plan applications, he said.
Many student debt relief companies are "price-gouging," said Josuwiet, though his company is interested in whether borrowers would be willing to pay a small fee, like $40, to have their repayment plan applications completed for them. "The question is 'what is a fair price?'"