By John Wasik
College “loan relief” firms continue to operate online while sleepy federal and state regulators play catch-up. These are the most insidious of scams that prey upon the more than 40 million Americans struggling with $1.2 trillion in student debt.
These operators keep their doors open because there is no effective regulation over them. The U.S. Dept. of Education (DE) has done nothing to shut them down, even though the department is fully aware of what they’re doing.
The modus operandi of these fraud merchants is stunningly simple: They offer to either get rid of your student loans or charge you money to fill out free federal paperwork to restructure your debt. You can do all of this yourself through the DE Web site, although few know about it nor do colleges tell you about it.
Although these scam artists have been swindling graduates for years, the most active prosecution has been on the state level. Illinois Attorney General Lisa Madigan has filed suit against a half dozen of these firms. Recently, though, the federal Consumer Financial Protection Bureau (CFPB) has stepped up enforcement.
Yesterday, the CFPB asked a federal court for a judgment in a suit brought against Student Loan Processing, Inc. in Laguna Nigel, California. The agency alleged that the firm “and its owner, James Krause, preyed upon students looking for loan repayment help and fleeced them out of millions.”
“In December 2014, the CFPB filed a federal lawsuit against the firm and Krause “alleging that the defendants charged consumers illegal upfront enrollment fees before providing any services, deceived customers about the costs of their services, and falsely represented an affiliation with the Department of Education.” Here’s a copy of the court’s proposed final judgment.
The larger question for federal regulators and prosecutors is why these firms have been able to freely operate for years. They are incredibly easy to find and access – even more so than the DE’s loan repayment site. If you do an online search for “student loans” or “student debt forgiveness,” the sites for these firms pop up first.
When I researched and wrote about these firms for this blog and Forbes magazine last year (Maggie McGrath assisted greatly on this piece), I thought it would be wake-up call for the DE and CFPB. Although I sense that they’re investigating these firms behind the scenes – a broader crackdown may be coming – it’s clear that more action needs to be taken to regulate these outfits.
In the interim, you can to be careful not to get trapped by these firms. Here are three red flags:
— Upfront Fees. Borrowing a page from mortgage “relief” scams that mushroomed after 2008, the student debt scamsters ask for an upfront fee of hundreds of dollars to process forms. Although they provide almost no meaningful counseling, they will take hundreds of dollars. It’s illegal to take these fees under a Federal Trade Commission rule.
— Ongoing Fees. To add insult to injury, firms like Student Loan Processing clipped victims for exorbitant continuing fees. According to the CFPB:
“The company charged consumers an initial enrollment fee for its services of 1 percent of the borrower’s federal student loan balance plus a monthly maintenance fee of at least $39 per month for the entire repayment term of the borrower’s federal student loan.” Worse yet, the company didn’t disclose this fee arrangement to those who signed up.
— Failure to Disclose Free Federal Benefits. Here’s the ironic clincher: If you have federal loans, you have nine repayment options. And you don’t have to pay a fee to sign up for any one of them. You can even consolidate your loans.
Lose a job or heading to graduate school? You can obtain a loan deferment. Just barely getting by? Then you can opt for income-based repayment. You can even increase your payments if you start to make decent money and want to pay off your loan quicker, which will save you on interest expenses. Private loans are different animals: You’ll have to negotiate directly with the lenders or refinance through a third party.
Sadly, the federal loan repayment provisions are poorly communicated to the general public, which provided a huge opening for shady operators. I’m constantly asked who provides counseling on the best repayment plans, but I can only refer them to the inadequate federal site.
It’s easier to resolve a cable television problem than it is to figure out the best loan repayment plan. I know that’s saying a lot.
In a perfect world – or even in a slightly better one – the DE or CFPB would provide a toll-free number for loan counseling. Better yet, Congress would allow graduates to refinance their loans at rates akin to what big banks are paying now, which is almost nothing. Don’t hold your breath waiting for Congress to act. Pare down your payments and principal now.
This article was written by John Wasik from Forbes and was legally licensed through the NewsCred publisher network.