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Consumer Watchdog, News

New CFPB Rules Get Tougher With Payday-Lender Debt Traps

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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In early October, the Consumer Financial Protection Bureau announced it would implement long-awaited new rules aimed at limiting the power of payday and title lenders. The bureau director, Richard Cordray,  has been a vocal critic of the nonbank lenders, and the agency has been working on new rules to regulate lenders in this space for several years.

“The CFPB’s new rule puts a stop to the payday debt traps that have plagued communities across the country,” Cordray said in a statement. “Too often, borrowers who need quick cash end up trapped in loans they can’t afford. The rule’s common sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail.”These rules will apply to both brick-and-mortar and online lenders.

What changes are happening

Lenders are going to have to prove that a borrower can afford to repay the loan

One of the major rules is a “full-payment test” that will determine if borrowers can “afford the loan payments and still meet basic living expenses and major financial obligations.” Payday lenders typically don’t run a credit report on borrowers and only usually look at a pay stub to determine if you qualify.

Most consumers end up unable to repay the loan when it comes due, usually a couple weeks later. According to the CFPB, more than 80 percent of all payday loans are rolled over or renewed. The same is true for title loans, with 20 percent of borrowers losing their vehicle to title loan companies. Because there is little regulation on interest rates, these loans usually have APRs of 300 percent or more.

However, borrowers can avoid the full-payment test if the lender meets the following requirements: It must make 2,500 or fewer covered short-term or balloon-payment loans per year and earn no more than 10 percent of its revenue from such loans.

It won’t be as easy for lenders to access funds in borrowers’ bank accounts

Another issue is that many payday and title loans require access to the user’s bank account, where payments will be automatically debited. If the user does not have the amount available in his or her account, the account will be overdrawn. This usually results in the consumer being charged overdraft fees on top of the hefty interest already going to the payday lender.

According to the CFPB, “these borrowers incur an average of $185 in bank penalty fees, in addition to any fees the lender might charge for failed debit attempts, specifically, a late fee, a returned-payment fee, or both.”

One of the rules that the CFPB installed is a limit on attempted debits, so the lender has to get authorization from the consumer to debit the account more than twice. The CFPB also hopes to limit the amount of times a loan can be extended, as a way to decrease the fees the borrower must pay.

Borrowers can repay debt more gradually

To avoid the full-payment test, payday lenders can lend up to $500 if they structure the payments so the borrower can pay them off “more gradually.” However, there will be strict rules in place for this type of loan.

For example, lenders won’t be able to offer gradual repayment plans to customers who have recent or outstanding short-term or balloon-payment loans. They also can’t make more than three loans in quick succession and can’t make loans under this option if the consumer has already had more than six short-term loans or been in debt for more than 90 days on short-term loans over a rolling 12-month period.

Few options for borrowers in need

The CFPB’s long-awaited rules may help protect borrowers from predatory lenders, but don’t solve a key issue: There just aren’t that many viable alternatives for people who need to borrow small sums quickly.

A report from the Milken Institute, “Where Banks Are Few, Payday Lenders Thrive,” found that neighborhoods with more banks tend to have fewer payday lenders, and vice versa. There was also a strong correlation between payday lenders and neighborhoods with higher African-American and Latino populations as well as a greater instance of payday lenders where there are fewer high school and college graduates.

Jennifer Harper, who researched predatory lending in Chattanooga, Tenn., as part of the Financial Independence Committee for the Mayor’s Council for Women, said she hopes there will be a solution for consumers that doesn’t require them to take out a payday loan.

“We want to find an alternative to payday lending that would still allow people to access they need, without those crazy interest rates,’ she said. “Getting that quick access to cash may be fine for that day, but then it really puts a burden on the borrower long-term.”

Jason J. Howell,  a certified financial planner and fiduciary wealth adviser in Virginia, agrees with the new regulations taking place.

“The CFPB is taking the opportunity to protect the most vulnerable consumers: lower-income borrowers that are typically ‘un-banked,’” he said. “The proposed rule would reduce fees that make payday loans especially hard to pay back; and that could also reduce the issuance of these loans in the first place.”

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Zina Kumok
Zina Kumok |

Zina Kumok is a writer at MagnifyMoney. You can email Zina here

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Consumer Watchdog, Identity Theft Protection

The Guide to Freezing and Thawing Your Credit Report

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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The recent Equifax data breach that exposed the names, Social Security numbers, birth dates, addresses and, in some instances, driver’s license numbers of about 44 percent of the current American population has many consumers now rushing to freeze their credit scores. However, many consumers may not grasp what that really entails.

In a recent survey by CompareCards.com, a subsidiary of MagnifyMoney’s parent company, LendingTree.com, 78 percent of respondents said they had never put a freeze on their credit reports.

When you freeze and thaw your report, you are preventing anyone else from opening a credit account under your name without your knowledge. It’s a smart way to defend yourself against some cases of identity theft. Massive data breaches like the one that hit Equifax are stark reminders of the importance of protecting sensitive information from potential fraudsters, but that doesn’t mean you should wait until your information is compromised in a data breach to act.

“We should all be vigilant,” says Eva Velasquez, president of the Identity Theft Resource Center. “Being vigilant about your identity is just a part of the world that we live in. If being involved in a data breach is the catalyst that brings that to the top of your mind, then we can see that as a positive.”

What a credit freeze does — and doesn’t — accomplish

A credit freeze, or security freeze, is a tool consumers can use to restrict access to their credit reports. The freeze makes it harder for criminals to commit financial fraud using your information.

The freeze seals your credit reports so that new requests won’t be processed without your approval. You will need to use a personal identification number — only you will know it — to lift or thaw the freeze before creditors can again have access to your credit report. A freeze adds a layer of security, since most creditors won’t extend new credit without seeing your report.

You will need to request a credit freeze with each of the big three reporting bureaus — Equifax, TransUnion and Experian — for the freeze to have the biggest impact.

Freezing your credit report will NOT:

  • Impact your credit score
    • A credit freeze will have no impact whatsoever on your credit score. Freezing your credit will neither raise nor lower your score.
  • Restrict existing creditors’ access to your report
    • Your current creditors, government agencies or debt collectors acting on behalf of those parties will still have access to your credit report if you freeze it.
  • Keep you from opening new credit
    • You will still be able to use your credit report to do things like open a new credit account, apply for a mortgage, rent an apartment or take any other action that calls for a credit check. But you’ll need to lift the temporary freeze before lenders can gain access to the report. If you know you’ll be doing any of those activities, you can temporarily lift the freeze for a certain party or a length of time, but it may cost you money to do so.
  • Prevent a criminal from committing fraud involving your existing accounts.
    • Freezing your credit report won’t prevent you, or any would-be thieves, from using your existing credit accounts. You will still need to vigilantly monitor all of your personal bank, credit and insurance accounts for fraudulent transactions or other signs of fraudulent activity.
  • Stop you from receiving prescreened credit offers
    • Freezing your credit report won’t stop lenders from sending you prescreened credit offers, as they prequalify new customers using a “soft pull.” A soft pull doesn’t show up on your credit report or harm your credit score. Banks buy the names of people who meet their credit criteria from credit bureaus to create their prequalification lists. So when you are prequalified, it just means you’re on a list somewhere. If you want to stop receiving such credit offers, call 888-5OPTOUT (888-567-8688) or ask to be excluded here.
  • Protect you from all forms of ID theft
    • A credit freeze can help to prevent financial fraud, but it will still leave you vulnerable to many other kinds of fraud. When criminals obtain important and sensitive information like your Social Security number as they did in the Equifax breach, they can use this data to commit criminal, medical, tax and employment theft, too. For example, a thief could use your Social Security number to file a tax return and claim a fraudulent refund, or use your personal information to obtain medical care or employment without your knowledge. Remain vigilant to protect yourself from other forms of fraud. Pay careful attention to any mail or phone calls from a medical office, government agency or other entity. They may be reaching out to verify your identity or report that someone else is attempting to commit fraud in your name.

How to freeze your credit report

You must go through a separate process with each of the three major credit bureaus to freeze your credit report.

Equifax

Equifax ID PatrolTM You can freeze your Equifax credit report online, by phone or by mail.

  • Online: In a statement issued in The Wall Street Journal on Sept. 27, Equifax said it would offer a new service that permanently allows consumers to lock and unlock their credit reports for free. The service is set to debut by Jan. 31, 2018.

    In the meantime, you can still freeze your Equifax score the traditional way, by visiting the Equifax security freeze site. You will first need to fill out a form with your personal information, then make any payment required by your state. Equifax’s site may be experiencing high traffic as a result of the recent breach, so it may not be able to process your request right away. If that is the case, try one of the other methods or try again online in a day or two.

  • Phone: Call 1-800-685-1111 (New York residents call 1-800-349-9960), and you should be connected with an Equifax representative who will verify your personal information and assist you with your credit freeze request.
  • Mail: Request your credit freeze by certified mail. If you’re a victim of identity theft, this is the channel you will need to use; your request must be submitted in writing with relevant documents, like a police report or other documented proof of theft, to have your fee waived. Write a letter to the reporting agency requesting the credit request and send it to the following address: Equifax Security Freeze/P.O. Box 105788/Atlanta, GA 30348

TransUnion

TrueIdentity You can freeze your credit TransUnion report online, by phone or mail, or by using TrueIdentity,

  • Online: Go to the TransUnion security freeze site. You will need to log in or create a TransUnion account before you can submit your request online.
  • Phone: Call 1-888-909-8872 and a TransUnion representative should verify your personal information and assist you with your credit freeze request.
  • Mail: Request your credit freeze by certified mail. Write a letter to the reporting agency requesting the credit request and send it to the following address: TransUnion LLC/P.O. Box 2000/Chester, PA 19016
  • TrueIdentity: TransUnion offers a free credit report monitoring service called TrueIdentity. The service allows users to lock and unlock their credit report with a swipe on their mobile device or a click online. It gives access to unlimited TransUnion Credit report refreshes, and alerts you if an entity pulls your TransUnion credit report.

Experian

Experian You can freeze your Equifax credit report online, by phone or by mail.

  • Online: Go to the Experian security freeze site. Select “add a security freeze,” then “apply online” and you’ll be redirected to a form requesting your personal information. Submit the form and make any payment required by your state to freeze your report.
  • Phone: 1-888-EXPERIAN (1-888-397-3742). Press 2 to be guided through prompts to request a security freeze.
  • Mail: Request your credit freeze by certified mail. Write a letter to Experian requesting the credit request and send it to the following address: Experian Security Freeze/P.O. Box 9554/Allen, TX 75013

How to thaw your credit report with each agency

Equifax

You can temporarily thaw your Equifax credit report via mail, online Equifax's security freeze site, or by calling 1-800-685-1111. (New York residents dial 1-800-349-9960.) Send mailed requests to the following address:
Equifax Security Freeze/P.O. Box 105788/Atlanta, GA 30348

TransUnion

You can temporarily thaw your TransUnion credit freeze by mail, online or via TransUnion’s credit freeze site, or by calling 1-888-909-8872. Send mailed requests to the following address: TransUnion LLC/P.O. Box 2000/Chester, PA 19016

Experian

You can temporarily thaw your Experian credit report by mail, online via Experian’s security freeze site, or by calling 1-888-397-3742. Send mailed requests to the following address:
Experian/P.O. Box 9554/Allen, TX. 75013

How much a credit freeze will cost you — by state

The protection isn’t free. Each time you freeze your report, temporarily lift a freeze or permanently end one, you may have to pay a fee. In the wake of the Equifax hack, consumer advocacy groups and some lawmakers have renewed their efforts to allow data breach victims to sign up for free credit freezes in their states.

“It is outrageous that the credit bureaus charge us fees to prevent identity theft when we didn’t even give them permission to collect our information in the first place,” Mike Litt, a consumer program advocate with the U.S. Public Interest Research Group, said in a statement a little over a week after the Equifax data breach was made public.

Sens. Elizabeth Warren (D-Mass.) and Brian Schatz (D-Hawaii) introduced the Freedom from Equifax Exploitation (FREE) Act on the same day. The act is intended to make actions related to freezing credit reports free for all consumers nationwide.

Until the proposed act wends its way through both houses of Congress, the amount you may pay to freeze, thaw or permanently end a credit freeze will vary from state to state and may be up to $10.

The majority of states have laws in place that cap the amount a credit reporting agency is permitted to charge consumers to freeze, lift, or thaw their credit reports. A U.S. PIRG analysis released shortly after the breach found only four states — Indiana, Maine, North Carolina, and South Carolina— have laws in place that provide free credit freezes, thaws, or lifts for their citizens. The analysis found an additional four states provide free freezes, but charge for thaws.

There is a silver lining for some. If you can present documentation showing you are a victim of identity theft at the time you place a freeze on your credit, most states will waive fees.

You can check what your state will charge you for each action below. Multiply the amount by three because you will need to pay each credit bureau.

In a Sept. 15, 2017, statement addressing the recent breach, Equifax said it would waive security freeze fees for all consumers through Nov. 21 and refund those who have paid to place or remove a credit freeze since 5 p.m. on Sept. 7, just after the breach was announced.

Nearly every state has legally identified definitions of a “protected consumer,” which may be a minor, an elderly citizen, a service member, a spouse of a victim of ID theft, a medically incapacitated person or some other distinction. Depending on the state, a protected consumer may pay a different amount or have his or her fee waived. The National Conference of State Legislators has more information on whom each state counts as a protected consumer, here.

State

Consumer Category

Freeze

Thaw

End Freeze

Alabama

Victim of ID theft

free

free

free

Senior (65+)

free

$10

$10

All other consumers

$10

$10

$10

Alaska

Victim of ID theft

free

free

free

All other consumers

$5

$2

$2

Arizona

Victim of ID theft

free

free

free

Protected Consumer

free

n/a

free

All other consumers

$5

$5

$5

Arkansas

Victim of ID theft

free

free

free

Senior (65+)

free

$5

free

All other consumers

$5

$5

$5

California

Protected Consumer

$10

n/a

$10

Minor <16

free

n/a

free

Senior (65+)

free

free

$5

All other consumers

$10

$10

$10

Colorado

Victim of ID theft

free

free

free

All other consumers

$10

$12

$12

Connecticut

Victim of ID theft

free

free

free

Protected Consumer

free

free

free

All other consumers

$10

$10

$10

Delaware

Victim of ID theft

free

free

free

Protected Consumer

free

free

free

Senior (65+)

$5

free

free

All other consumers

$10

free

free

District of Columbia

Victim of ID theft

free

free

free

All other consumers

$10

free

free

Florida

Victim of ID theft

free

free

free

Protected Consumer

free

n/a

free

Senior (65+)

free

n/a

free

All other consumers

$10

$10

$10

Georgia

Victim of ID theft

free

free

free

Minor < 16

free

n/a

free

Senior (65+)

free

$3

$3

All other consumers

$3

$3

$3

Hawaii

Victim of ID theft

free

free

free

All other consumers

$5

$5

$5

Idaho

Victim of ID theft

free

free

free

All other consumers

$6

$6

$6

Illinois

Victim of ID theft

free

free

free

Minor < 18

n/a

n/a

n/a

Senior (65+)

free

$10

free

Active-duty military

free

free

free

All other consumers

$10

$10

$10

Indiana

Victim of ID theft

free

free

free

Protected Consumer

free

free

free

All other consumers

free

free

free

Iowa

Victim of ID theft

free

n/a

n/a

All other consumers

$10

$12

$12

Kansas

Victim of ID theft

free

free

free

All other consumers

$5

$5

$5

Kentucky**

Victim of ID theft

free

free

free

All other consumers

$10

$10

$10

Louisiana

Victim of ID theft

free

free

free

Protected Consumer

$10

n/a

n/a

Senior (62+)

free

free

free

All other consumers

$10

n/a

n/a

Maine

Victim of ID theft

free

free

free

Protected Consumer

free

free

free

All other consumers

free

free

free

Maryland

Victim of ID theft

free

free

free

Minor < 16

n/a

n/a

n/a

All other consumers

$5

$5

$5

Massachusetts

Victim of ID theft

free

free

free

Protected Consumer

n/a

n/a

n/a

All other consumers

$5

$5

$5

Michigan

Victim of ID theft

free

free

free

Protected Consumer

free

n/a

free

All other consumers

$10

$10

$10

Minnesota

Victim of ID theft

free

free

free

All other consumers

$5

$5

$5

Mississippi

Victim of ID theft

n/a

n/a

n/a

All other consumers

$10

$10

$10

Missouri

Victim of ID theft

free

free

free

All other consumers

$5

$5

free

Montana

Victim of ID theft

free

free

free

All other consumers

$3

$3

free

Nebraska

Victim of ID theft

free

free

free

Minor < 16

free

free

free

All other consumers

$3

$3

$3

Nevada

Victim of ID theft

free

free

free

Senior (65+)

free

free

free

All other consumers

$10

$10

$10

New Hampshire

Victim of ID theft

free

free

free

All other consumers

$10

n/a

$10

New Jersey

Victim of ID theft

free

$5

$5

All other consumers

free

$5

$5

New Mexico

Victim of ID theft

free

free

free

Senior (65+)

free

free

free

All other consumers

$10

$5

$5

New York

Victim of ID theft

free

free

free

Protected Consumer

free

free

free

All other consumers

free

n/a

$5

North Carolina

Victim of ID theft

free

free

free

Spouse of ID Theft Victim

free

free

free

Minor < 16 if file must be created

$5

n/a

$5

Senior (62+)

free

free

free

Other consumers

free

free

free

North Dakota

Victim of ID theft

free

free

free

All other consumers

$5

$5

n/a

Ohio

Victim of ID theft

free

free

free

All other consumers

$5

$5

$5

Oklahoma

Victim of ID theft

free

free

free

Senior (65+)

free

free

free

All other consumers

$10

$10

$10

Oregon

Victim of ID theft

free

free

free

Minor < 16

free

n/a

free

All other consumers

$10

$10

$10

Pennsylvania**

Victim of ID theft

free

free

free

Senior (65+)

free

$10

free

All other consumers

$10

$10

free

Rhode Island

Victim of ID theft

free

free

free

Senior (65+)

free

free

free

All other consumers

$10

$10

$10

South Carolina

Victim of ID theft

free

free

free

Protected Consumer

free

free

free

All other consumers

free

free

free

South Dakota**

Victim of ID theft

free

free

free

Minor < 16 if file must be created, or Protected Consumers

$5

n/a

n/a

All other consumers

$10

$10

$10

Tennessee

Victim of ID theft

free

free

free

Minor < 16

$10

n/a

$10

All other consumers

$7.50

free

$5

Texas

Victim of ID theft

free

free

free

Protected Consumer

free (fee applicable if record must be created)

n/a

free

All other consumers

$10

$10

$10

Utah

Victim of ID theft

free

free

free

All other consumers

$10

$10

$10

Vermont

Victim of ID theft

free

free

free

All other consumers

$10

$5

$5

Virginia

Victim of ID theft

free

free

free

Protected Consumer

free

n/a

free

All other consumers

$10

free

free

Washington

Victim of ID theft

free

free

free

Senior (65+)

free

free

free

All other consumers

$10

$10

$10

West Virginia

Victim of ID theft

free

free

free

All other consumers

$5

$5

$5

Wisconsin

Victim of ID theft

free

free

free

Non-victims

$10

$10

free

Wyoming

Victim of ID theft

free

free

free

All other consumers

$10

$10

$10

Sources: Consumersunion.org Transunion.com NCSL.org
**In Kentucky, Pennsylvania and South Dakota,  security freezes expire after seven years.

When a credit freeze makes sense — and when it doesn’t

You should freeze your credit report when you are in danger of financial or identity fraud.

Eva Velasquez, of the Identity Theft Resource Center, says consumers should consider freezing their reports if they are victims of identity theft or at an increased risk of having their information misused for identity theft because of lost or stolen items.

Consumers might also consider a credit freeze “if their personal information, specifically their Social Security number, is compromised in some way, like in that of a data breach,” says Velasquez.

Freezing your report is an important consumer protection you can and sometimes should take advantage of as a general consumer. However, there are several occasions when you may not want to freeze your credit.

  • You are planning to open a new line of credit (credit card, mortgage, etc.) in the near future.
  • You work for a company that requires a regular background check or access to your credit report.
  • You regularly open new accounts with financial institutions.

Ultimately, if you are not in danger of ID theft, the decision to freeze or unfreeze your credit report depends on whether or not you’re willing to go through the inconvenience and cost of unfreezing and refreezing each time an entity you approve of wants access to your credit report. If you want a more convenient way to monitor use of your credit report, you may want to consider placement of a credit fraud alert instead of the freeze, as explained below.

Pros and cons of freezing your credit report

Pros:

  • Locks your credit report
    The most obvious benefit you’d get from freezing all of your credit reports is an additional layer of protection. Only you can permit a lender or other entity to receive your full, detailed credit report. You’ll have the opportunity to verify a request’s legitimacy before anyone can obtain your report.
  • No impact on your credit score
    Neither freezing nor thawing your credit report will affect your credit score. Your credit score is impacted by positive or negative activity on your end. Adding protection is considered a neutral action.
  • Generally free for ID theft victims
    If you’re a victim of ID theft, you won’t be required to pay any fees to freeze, thaw or lift a freeze on your credit report in most states. However, you may need to provide additional documentation proving the theft and submit your request in writing.

Cons:

  • Need to plan before opening a credit line
    The added protection comes with the added inconvenience of freezing, or thawing your credit report when you need to apply for credit. This will take just a bit of forethought and may cost you up to $10 each time you thaw your report. You may take several minutes to complete thaw requests for all three bureaus online, which will make it a little more difficult to apply for a credit card in the checkout line. You can manually refreeze your accounts or set your request to automatically do so on a certain date.
  • Fees, unless you’re a victim of ID theft
    Each action — freezing or lifting a freeze — may cost you $3 to $10 in many states. The cost is often tripled, as it’s necessary to freeze or thaw all three of your credit reports if you are unsure which bureau the entity requesting your report will use. The cost may be high for some consumers. Freeze and thaw your reports wisely, and ask the requesting entity which bureau it uses to avoid paying unnecessary fees whenever you can.

An alternative to freezing your credit report

If you don’t think you are in immediate danger of ID theft, you can opt for less-drastic protection and set up a credit fraud alert with all three bureaus instead. When you have the alert set, all lenders attempting to pull your credit history will see a flag on the reports, alerting them to verify your identity before extending credit.

The entity is not required to go through additional verification, but the warning puts it at that entity’s discretion. You will still be able to apply for credit whenever you’d like, and won’t need to remember a PIN to unlock your credit report.

Additionally, fraud alerts are temporary. In most cases, you will be required to renew the alert in 90 days.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at [email protected]

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Consumer Watchdog

The Truth About ‘Obama Student Loan Forgiveness’

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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The average 2016 college graduate carries $37,000 worth of student loan debt today according to an analysis of student loan debt by Mark Kantrowitz, publisher of Cappex.com. Kantrowitz tells MagnifyMoney he expects that number to rise for 2017 graduates.

It’s no wonder that those drowning in debt can get desperate. And scammers have come up with a clever way to dupe these borrowers into spending money on services that promise to erase their debt. One of the most popular student loan scams today involves companies that charge borrowers to sign up for the so-called “Obama Student Loan Forgiveness” program.

The only problem is that there is no such loan forgiveness program.

The truth about “Obama Student Loan Forgiveness”

So-called student “debt relief” companies use “Obama Student Loan Forgiveness” as a blanket term for the various flexible federal student loan repayment programs implemented over the last decade by the Bush and Obama administrations.

What they don’t tell unwitting consumers is that these programs, which include income-driven repayment plans and Public Service Loan Forgiveness, among others, are free to borrowers and do not require paying for any special services in order to enroll.

Promising relief to indebted college graduates, these companies lead people to believe that enrolling in these programs requires special assistance — which they may offer for a sizable upfront fee and/or recurring monthly payments. Rather than getting the help they need, borrowers are duped into paying for something they could easily accomplish for free with a simple phone call to their student loan servicer.

While there are multiple ways you can get scammed by debt relief companies claiming to offer you “Obama Student Loan Forgiveness,” there are some red flags that can help you spot a scam.

6 ways to spot a student debt relief scam

It’s important to note that it’s not illegal for a company to charge a borrower to enroll them in a program that’s free to them. These companies are arguably taking some of the work out of getting enrolled, even if that “work” could easily be accomplished with a phone call to your student loan servicer.

Nonetheless, some debt relief firms take things a bit too far, and it’s important to be aware of scams out there. After all, student loan forgiveness scams are really only one part of a broad range of debt relief scams. Debt relief scams share many of the same qualities and employ similar tactics to mislead consumers into paying for their services.

Here are some red flags to watch out for:

  1. They ask for fees upfront. By law, debt relief services are not allowed to ask for payment until they have performed services for their customer. A legitimate debt relief service may ask for a fee upfront, but they will place that payment in an escrow account, and they will not officially receive the payment until they complete the work.
  2. They charge fees for free government services. This one is a bit tricky. So long as a company makes it clear that it is possible to gain access to a government debt relief program for free, it’s not illegal for them to charge consumers for their help in enrolling in those programs. However, the worst actors out there will keep that information to themselves, leading consumers to believe they need to pay a professional for access.
  3. They claim to be affiliated with the U.S. Department of Education. The Department of Education, which manages the federal student loan system, does not partner with any debt relief services. Any company claiming to be associated with the Department of Education is a scam.
  4. They “guarantee” that your debt will be forgiven. Services will try to entice customers by promising total loan forgiveness or a reduction in their student loan payments. But monthly payments for borrowers enrolled in federal student loan repayment programs are established by law and cannot be negotiated. Also, the legitimate loan forgiveness programs out there usually require making payments for several years, and there is no company that can promise loan forgiveness unless you meet those payment requirements first.
  5. They advertise “pre-approval” for debt relief programs. There is no “pre-approval” for federal income-driven repayment or loan forgiveness programs. They are free for borrowers, and so long as your loans are in good standing, it’s a matter of the types of loans you have when you took them out that qualifies you for the different programs. To see if you qualify for a given program, contact your loan servicer directly.
  6. They offer to make your student loan payments for you. You should be the only person submitting payments to your loan servicer. The Department of Education has contracted these loan servicers to manage federal student loans, and loan payments should be made directly through their websites. Never send your payment to a debt relief firm, even if they promise to pay your loans for you. The exception here is if you’re working with a debt relief firm to settle a debt with a lump-sum payment. In that case, they are legally required to hold your cash in an FDIC-insured account until they officially settle the debt. And if their client decides they no longer want their services, they have to return the funds to them in full.

Do your due diligence before working with any debt relief service, by keeping an eye out for these red flags, as well as checking sites like the Consumer Financial Protection Bureau, the Federal Trade Commission, or the Better Business Bureau for complaints against the company.

What to do if you’ve fallen for a student debt relief scam

If you’ve been scammed by a debt relief company, there are certain steps you need to take to prevent further financial damage. However, know that it is possible you may never get your money back.

Submit a complaint to the Consumer Financial Protection Bureau and the Federal Trade Commission. Reporting scams, can not only help others from losing their money, but if an investigation by the CFPB or FTC results in suit and judgment, then the debt relief company may be required to issue refunds, cease business, and ensure borrowers do not miss out on important repayment benefits.

Track your credit reports with all three credit bureaus to ensure your personal information is not used fraudulently. You can get one free credit report each year at annualcreditreport.com or use these free services to monitor your report for suspicious activity. If you fear a debt relief scammer has your Social Security number and other financial information, you might want to consider a credit freeze. That will stop anyone from being able to open a new line of credit without you knowing.

Contact your loan servicing companies and have any power of attorney authorizations removed. Some companies will ask borrowers to give them power of attorney so they can negotiate directly with their loan servicers. You don’t want to leave any company with this privilege because they will be able to make decisions about your loans without you knowing.

Contact your bank or credit cards to stop payment to the debt relief company and see if they can work with you to try and get your money back. It is common for debt relief services to charge monthly recurring fees for their services.

Change your Federal Student Aid password. Every federal student loan borrower has a unique login for the https://studentloans.gov site, where you can track all of your federal loans. If you gave a company your FSA information, consider that information compromised and change your FSA password immediately.

9 Legitimate Student Loan Forgiveness Programs

While there is no such program called “Obama Student Loan Forgiveness,” there are several legitimate student loan repayment programs that offer student loan forgiveness.

These programs have a wide range of requirements and payment terms, some as short as five years, others as long as 25 years, and can be available based on the types of federal student loans you have as well as your chosen career.

In addition to loan forgiveness programs, there are programs that offer loan repayment assistance or loan discharge. How much can be discharged and the amount of repayment assistance varies greatly depending on the program.

9 examples of legitimate loan forgiveness programs, loan repayment assistance programs, and loan discharge programs

Program

Qualifications

How to apply

Max. loan amount forgiven

More info

Federal Teacher Loan Forgiveness

Teachers must complete five consecutive years of teaching at a low-income (Title I) school.

Application

Up to $17,500 in federal loans can be forgiven after five years.
Forgiven debt is not considered taxable income.

Studentaid .gov

MagnifyMoney’s guide to teacher loan forgiveness covers state programs as well as federal.

Public Service
Loan
Forgiveness
(PSLF)

Must work in a qualifying public service job, be enrolled in an income-driven repayment plan, and make 120 on-time payments.

Reserved for students who graduated after Oct. 1, 2007.

Contact your loan servicer and submit a Public Service Loan Forgiveness Employment Certification Form each year.

Total remaining balance, plus interest

Studentaid.gov:
PSLF

Income-Driven
Repayment

Eligibility depends on the types of loans, when the loans were borrowed, and whether they were borrowed for undergraduate or graduate programs.

Contact your loan servicer. Submit an IDR Plan Request with proof of income to each of your loan servicers

Outstanding balance after reaching end of repayment term is forgiven.
Note: forgiven debt may be considered taxable income.

Contact your loan servicer directly.

Military Service

Upon enlistment you agree to a minimum term of service and enroll in the military branch’s loan repayment program.
Most of the programs offer to pay one-third of the eligible amount for each year of service.

Be sure to discuss your eligibility for loan repayment programs with your recruiter and request enrollment as soon as possible.

Varies by branch.

Army and Navy offer a maximum of $65,000.
The National Guard offers $50,000, and the Air Force offers
$10, 000.

The program only applies to federal loans. There are a few exceptions for greater amounts depending on occupation. For example, a dentist could earn up to $120000 of loan repayment assistance, and an Air Force Jag Officer could earn up to $65,000 toward student loan repayment.

Americorps

Upon completing a term of service in one of three approved Americorps programs, you are eligible for the Segal Americorps Education award that can be used to pay current student loans or for educational expenses later on.

Apply to Americorps and if accepted, complete 12 months of service.

Currently, the total maximum you would be able to receive is $11,630. But students can complete the program twice, earning double the amount of forgiveness.

This education award would be considered taxable income.

The award must be used within seven years of completion of your Americorps service.

National
Institute of
Health (NIH)
Loan
Repayment

US citizens with federal or certain private loans in good standing working in qualified research programs such as a doctor (M.D., Ph.D., and other doctoral degrees) whose education debt exceeds 20% of their annual income can apply for either extramural or intramural NIH Loan Repayment Programs.

Determine which of the five Loan Repayment Programs best applies to your situation and submit your application and any required supporting documentation during the open application period.

$35,000 a year, with award terms that are either two or three years depending on the program.

In 2017, applications for all of the programs opens September 1, 2017, and have various closing dates with the earliest being November 15, 2017.

Loan
Repayment
Assistance

States or schools may offer these programs to those working in public service or under served rural areas.

Check with each individual program. For those working in a health related field you can learn more about repayment assistance programs here.

Lawyers, you can visit the American Bar Association Website to find out what states offer loan repayment assistance.
Those with a law degree can learn more about repayment assistance offered by law schools here.

Depends on the program

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Closed School Discharge

If a school closes while you are enrolled or closes within 120 days of your withdrawing, you could qualify for 100% discharge of your federal student loans.

Contact your loan servicer(s) to get the application for discharge.

100% of federal student loans

Make sure you keep your loans in good standing by continuing to make payments while you wait to hear back on your discharge application.

Disability Discharge

If you are totally and permanently disabled and can establish that under the specific requirements of the program you could have your federal student loans discharged.

Must submit proof of your disability.

There is no cap on the amount that will be discharged.
Discharged debt may be taxable.

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What to do if you can’t afford your student loan payments

If you are struggling to afford your student loan payments, there are some actions you can take to ensure your loans remain in good standing and you avoid a default that could negatively impact your credit score.

Enroll in an income-driven repayment plan

If you are unable to afford your current payment, you can apply to change repayment plans. For example, if you are on a Standard Repayment Plan for your federal student loans, you could request to enroll in an income-driven repayment plan. If you are already on an IDR plan and your income has changed significantly, you can request to have your payment amount recalculated.

Ask for a deferment or forbearance

If you are going through a temporary financial hardship, you can ask your loan servicer to apply a deferment or forbearance, which would not require you to make payments during the deferment or forbearance. While both a deferment and forbearance offer you relief from making payments, with a forbearance you will be required to eventually pay back the interest that accrues during that time. Also, it’s important to note that while you are in deferment or forbearance, you aren’t making payments, which means you might be missing out on forgiveness programs like PSLF if you are working in public service or for a nonprofit.

Consider refinancing or consolidating your loans

Refinancing involves taking out a new loan from a private lender and using that loan to pay off your old loan. The pros of refinancing include a reduced interest rate and the ease of having just one payment. If you refinance a federal student loan, you will lose all of the benefits that federal student loans offer.

Alternatively, you could consolidate your federal loans. A Direct Consolidation Loan combines all your loans using the average weighted interest rate into one loan. So instead of dealing with multiple loan servicers and multiple loan payments each month, you only have one student loan payment to make each month. You can apply for a Direct Consolidation Loan at no cost through the government’s Federal Student Aid website.

Work with your loan servicer

If you have private loans, your lender may not offer as many repayment options as federal loans. Reach out and work with your lender anyway. They may offer a financial hardship program that would lower your payments. Your loan servicer would much rather work with you to ensure they get paid.

Consider bankruptcy if you can pass the “hardship test”

While it is highly unlikely you will be able to discharge your student loans in bankruptcy, it isn’t impossible. You must either show that your loans would impose an undue financial hardship that will not go away or that the loan was not a qualified student loan in that it did not fit the definition or was in an amount that exceeds the school’s cost of attendance. An example of where this argument has been successful would be a private bar loan, a loan taken out to cover the expenses of taking the bar exam.

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Liz Stapleton
Liz Stapleton |

Liz Stapleton is a writer at MagnifyMoney. You can email Liz here

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