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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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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
How to apply
Max. loan amount forgiven
Federal Teacher Loan Forgiveness
Teachers must complete five consecutive years of teaching at a low-income (Title I) school.
Up to $17,500 in federal loans can be forgiven after five years.
Must work in a qualifying public service job, be enrolled in an income-driven repayment plan, and make 120 on-time payments.
Contact your loan servicer and submit a Public Service Loan Forgiveness Employment Certification Form each year.
Total remaining balance, plus interest
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.
Contact your loan servicer directly.
Upon enlistment you agree to a minimum term of service and enroll in the military branch’s loan repayment program.
Be sure to discuss your eligibility for loan repayment programs with your recruiter and request enrollment as soon as possible.
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.
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.
The award must be used within seven years of completion of your Americorps service.
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.
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.
Depends on the program
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.
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.
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.