According to the U.S. Department of Education, millions of borrowers are struggling to repay their federal student loans. Desperate for financial relief, some of these borrowers jump at enticing offers for lower monthly payments and loan forgiveness. Unfortunately, many of these opportunities are too good to be true, leading borrowers to fall prey to student loan scams. To avoid becoming a victim of a student loan scam, learn how these scams work and the warning signs of a student loan scam.
Types of student loan scams
There are several different types of student loan scams.
Advance-Fee Loan Scams
Advance-fee loan scams charge an an up-front fee to obtain a loan. They may want payment card or banking account information or have the borrower pay them directly. International students are particularly vulnerable to this type of scam.
But legitimate lenders do not charge up-front fees before the loan is funded. If the lender charges a fee, it is usually deducted from the disbursement. “Our federal loan servicers will never charge fees to help borrowers with their student loans,” the U.S. Department of Education explains. “If you’re asked to pay an up-front or maintenance fee, you’re not dealing with the ED, so do not share your information.”
Student Loan Relief Scams
Student loan relief scams and bogus credit-repair services charge an up-front fee to apply for student loan forgiveness or a reduced monthly payment. These tend to be highly appealing offers that promise huge savings to pique a person’s interest, such as slashing monthly payments in half.
Some scammers may even claim that they can wipe out student loan debt entirely, for a fee. Such false claims can no doubt be alluring. But it’s not something student loan debt relief companies have the power to do. There are strict eligibility requirements, and it isn’t something that can be cancelled overnight.
These firms say that they file paperwork on behalf of the borrowers. But, you can easily file the forms online yourself, for free, at StudentLoans.gov. It isn’t rocket science. Changing your repayment plan takes just a few minutes.
Charging an up-front fee before the credit repair service is complete is illegal under federal and state laws. The Federal Trade Commission (FTC) and several state attorneys general have cracked down on this type of scam as part of Operation Game of Loans.
Consolidation Loan Pitches
There’s the student loan debt consolidation angle, which targets individuals with multiple loans. The premise is that the loans can be consolidated into just one payment per month, thereby lowering a borrower’s costs. The claimed savings may be bogus, as a lower monthly payment increases the total interest paid. Most of the savings from refinancing a loan may come from a shorter repayment term, not from a lower interest rate.
While there are certainly legitimate loan consolidation options out there, scam artists will usually ask for bogus fees. However, legitimate lenders do not charge fees for a consolidation loan.
Beware of companies that seek to refinance federal student loans into private loans. Federal student loans usually have lower fixed interest rates and superior benefits to the private student loans.
Refinancing federal student loans means a loss in many benefits – income-driven repayment plans, any federal forgiveness programs, generous deferment options, and more.
Red flags to look out for
There are several warning signs that can help you identify a scam.
An Up-front Fee. Requesting an up-front payment is almost always a sign that something is fishy. Fraudsters will seek payment before any services have been performed and never deliver. Note that many resources charge nothing for student loan assistance. And if they do, it’s only after providing services. Therefore, borrowers should always be wary of companies wanting immediate payment.
False Sense of Urgency. Time pressure is another common theme. Scam artists like to play on your fear of missing out. They tell you that if you don’t act quickly, you’ll forfeit the opportunity for a great loan, smaller repayments or other benefits. They may use phrases like “Limited time offer” or “Act now” to get you to rush. Their goal is to get your money as quickly as possible and move onto to the next victim. Having tight deadlines to contact a company and issue payment should certainly be cause for suspicion.
Use of Fear. Borrowers should also be on the lookout for overt scare tactics. For instance, they may say “Your account is flagged” to grab the person’s attention and get them to take swift action. Legitimate companies won’t resort to these types of aggressive techniques.
Requests for Your FSA ID. Scammers may ask for your Federal Student Aid (FSA) ID. The FSA ID is a username and password needed to access federal student loan websites. The FSA ID is also an electronic signature, akin to handing a blank check over to the scammer. With your FSA ID, the scammer can access your account and make changes, such as sending your student loan bills to a different address.
Asking for Other PII. Asking for sensitive, personal information is an additional warning sign. Don’t share your credit or debit card numbers or your bank account number with anybody. Also be careful about sharing your date of birth or Social Security Number, which opens the door to identity theft. In general, giving out personal information should be avoided unless you initiated contact, and even then, you should be careful.
Note that student loan scams can originate through multiple mediums. A scam may contact you by email, telephone, postal mail and even text messaging.
Individuals have paid more than $100 million to student loan scams, according to the FTC. It’s a widespread problem and ongoing nationwide efforts are trying to combat it.
Educating yourself about the most common types of scams and the techniques that are used is critical for staying safe and reducing your chances of becoming a victim.