Hit the brakes before you contact a debt settlement company to grapple with your student loans — some may be in hotter water than you are.
NerdWallet, a personal finance website, compiled a watch list of 130 entities, representing approximately 100 companies, that provide debt management and consolidation services for student loan borrowers.
In all, about 44 million people owe more than $1.4 trillion in college loan debt. More than 4 million debtors were in default last year, up from 3.6 million in 2015.
Debt settlement companies charge borrowers a fee to complete and submit paperwork to the Department of Education in order to help students consolidate their loans.
The catch is that this information is already available free of charge from the Education Department. Borrowers can also contact their lenders directly for consolidation and income-driven repayment options — and they can apply for them for free. And while many of these companies work with federal loans only, some also handle private loans.
The firms NerdWallet highlighted are facing enforcement actions and lawsuits from state attorneys general, liens for back taxes and other woes of their own, according to the analysis.
"Some of these firms are charging upfront fees, monthly retainers or a percentage of a borrower's total balance to put them into programs borrowers can apply for on their own for free," said Brianna McGurran, who specializes in student loans at NerdWallet.
Tip-off to suspicious behavior
Alarm bells should go off if a debt relief company asks for your Social Security number, demands your student loan ID information or asks you to grant power of attorney so that it can make payments on your behalf, McGurran explained.
"If you don't trust the company you're working with, cancel the contract and ask for a refund, change your bank account passwords and other personal details and tell your loan servicer what's going on," she said.
Additionally, you can file a complaint with your state attorney general, the Federal Trade Commission and the Consumer Financial Protection Bureau, as all three regulators are watching this issue.
Note that these debt relief agencies are different from non-profit credit counseling services, such as the National Foundation for Credit Counseling, which charge no or low fees for reviewing your household finances and negotiating your debt repayment.
The American Fair Credit Council, a trade association that represents debt settlement service providers, did not immediately return a phone call seeking comment on NerdWallet's findings.
Financial self-care
The worst thing you can do when you can't afford to pay is to ignore your creditor, industry observers say.
"It's easier to negotiate with your original creditor than if the debt gets sent off to a collection agency," said Katie Brewer, a certified financial planner and owner of Your Richest Life in Dallas.
Indeed, federal loan borrowers who default may have their debt sent to a collection agency.
A federal direct student loan goes into default if you haven't made payments for at least 270 days.
The consequences of doing so are ugly: Your entire unpaid balance may come due. You may also lose eligibility for repayment programs, and your tax refunds and wages may be garnished.
Further, you may not be able to purge the debt if you file for bankruptcy. You would have to prove in court that repayment would impose an undue hardship on you.
The best move is to start a dialogue with your lender or your student loan servicer before you become delinquent on your loans.
Ask them about deferment or forbearance, which will allow you to temporarily stop making payments or to reduce the amount you pay for a specified period of time.
Federal student loans are also eligible for income-driven repayment plans, which cap what you pay each month based on your income. They also offer forgiveness of the remaining balance if you aren't fully paid up by the end of the repayment period.
Just be careful who you enlist to help you on your journey to becoming debt-free.
"Find your loan servicer and reach out to them first," McGurran said."They're being paid to help you repay your loans."
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