Scam Alert: Student Debt ‘Relief’

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Despite numerous state efforts to crack down on fly-by-night firms falsely claiming to reduce or eliminate young adults’ student loans, new firms keep popping up.

Their social media pitches and websites promise borrowers things the companies can’t possibly deliver on. They appeal to potential customers struggling to pay student loans with slogans like “Get Rid of Your Student Loans Today!” or “$17,500 in Up Front Forgiveness” – “100 percent guaranteed!”

In a high-stakes game of Whac-a-Mole, attorneys general in numerous states have repeatedly brought legal actions against these so-called “debt relief” companies in cases going back at least four years. Massachusetts resolved one case this past summer, and Pennsylvania filed a lawsuit last fall.  Florida has aggressively pursued several debt relief companies recently. The Federal Trade Commission and the Consumer Financial Protection Bureau have also gotten involved.

Student loan borrowers “are desperate for help, which is how these companies are able to grab them,” said Betsy Mayotte, founder of the Institute of Student Loan Advisors, a Boston-area non-profit she founded to provide free help to people wrestling with college loan payments.

Mayotte described egregious fraud against a client who came to her organization and had been paying her student loans for years, whittling down the amount she owed to $5,000 – but it ballooned to $12,000 after she got involved with a debt-relief firm that took over her loan payments. The company put the loan into the federal government’s forbearance program, where it went unpaid while accruing interest for two years. After the forbearance period expired, the debt relief company neglected to resume the loan payments, despite continuing to collect its monthly fee. The customer defaulted on her debt unwittingly – but never got a notice because her contact information on the loans had been changed.

Court documents filed by the states provide a roadmap to what borrowers should be looking out for to avoid being defrauded.

Debt relief firms operating around the country have myriad names – sometimes two names – but their tactics are all essentially the same. They charge an average $500 to $700 in upfront fees, and sometimes monthly fees, and purport to offer services that unsuspecting young adults could’ve received for free from the U.S. Department of Education. The fraudulent companies often give the misleading impression they are affiliated with the federal government, using words like “U.S.,” “federal program,” or “Obama” in their names and promotional materials, state officials said.

In one Florida case, Attorney General Pam Bondi alleged that a debt-relief company falsely promised to reduce or eliminate customers’ student loan debt and took hundreds or thousands of dollars of their money. The state’s various complaints against various debt-relief companies allege deceptive marketing practices and violations of state statutes limiting debt collection fees.

In a lawsuit pending in Pennsylvania on behalf of 66 state residents, Attorney General Josh Shapiro charged that one of the borrowers turned 45 loan payments over to the company, based in Texas, which put only 17 of them toward his student debt. Customers of the firm stopped paying their loans, “believing their payments … were being applied to their loans,” the complaint said. One customer’s loans went in forbearance without her knowledge, and she accrued $15,000 in additional interest charges – all the while paying $963 in fees to the company.

Massachusetts Attorney General Maura Healey has taken action against five different debt relief companies, alleging violations of a state law that bars such firms from requiring that fees be paid up-front if the firm doesn’t meet stringent requirements – which they rarely meet.  In June, one firm settled an action by agreeing to pay $45,000 to refund fees to borrowers and cease doing business in the state.

In Massachusetts’ largest case, in 2016, a debt relief company refunded $160,000 to some 400 customers for an average $400 each. The company also agreed not to continue its existing relationships with customers who do not file a form explicitly granting permission; to change its name and not use “US” in its name; and to disclose to future customers that it is a private company not affiliated with the federal government and that borrowers can receive the same service for free from the government.

Mayotte said she has fielded complaints about firms that loan money to borrowers so they can pay their fees – one company charged 28 percent interest.

The amount of college debt still outstanding, adjusted for inflation, has roughly tripled in a decade and is expected to continue to grow.

Borrowers beware: the deceptive, costly tactics and false promises about debt relief are also likely to continue.

Squared Away writer Kim Blanton invites you to follow us on Twitter @SquaredAwayBC. To stay current on our blog, please join our free email list. You’ll receive just one email each week – with links to the two new posts for that week – when you sign up here.