How to detect and prevent Student Loan Scams

Every year, tens of billions of dollars are given in student loan, with several available student loan options, there is no doubt that some of them are scammers trying to get your money. While it could be easy to spot a scammer from the kind of services they offer and the charges they demand, some are very careful to appear as a legitimate platform.

Scam or no Scam?

The Consumer Finance Protection Bureau (CFPB) has issued guidelines and warnings about how to spot a fake student loan platform, and how to avoid such scams. There are many companies that advertise student loan applications to help across social media or email platforms. Some of these companies go as far as offering you enticing packages while they “help” you secure a loan.

The most basic step in applying for a student loan, especially the Federally funded ones is that you don’t need to pay any fee to secure a loan. Applicants can sign up for student loans for free on the government student loans website.

On the other hand, while signing up may be free and can be done yourself, some people require help to sign up due to some complications that may arise during registration. For this reason, there are professional organizations in place that provide helpful services in applying for student loans. These organizations are allowed to charge service fees, by all implication not all of them are scams. However, you have to be very careful when selecting.

How to spot and avoid student loan scams

• Registration Scam and Enticing Offers: Some student loan companies will tell you that they can help you secure a loan at the “best” interest rate and other favorable loan terms, but you must pay a “small” advanced fee to access this service. The fee ranges from 1-5% of the total loan amount or a flat rate of $1000 (or less). This is clearly a scam because these companies only help with the registration process, but do not have the ability to negotiate loans with Federal student loan creditors. They are unable to help anyone secure a better loan deal.

• Legitimate student loan platforms do not require any outrageous advanced or upfront fees. All fees will be deducted from the disbursement check if any. Another way is to include the fee in the repayment amount. The two common fees that are charged are the 1% default fee charged by Federal student loans, and a disbursement or origination fee charged by private loans which are negotiable and defer by lenders. If you are using a third-party to register, you may be charged an upfront payment that should go into the third-party account or an escrow account, once they have successfully signed you up, with proof.
  

• Loan Consolidation Scam: It is a normal practice for many students who graduate to consolidate their student loans. Many third-party student loan companies also take advantage of loan consolidation to scam students. The most common of this type of scam is the one where a company charges you a consolidation fee (also called administrative fees or processing fees) but doesn’t do anything.

The Federal student loan doesn’t charge students any amount for loan consolidation. However, private student loans allow you to seek refinancing from other lenders rather than a consolidation. Refinancing and consolidation are two different things. In loan consolidation, you combine all your student loans into one loan for easy repayment. While refinancing means that you take a new loan from a single lender to pay off your other student loans while you focus on repaying the single lender. Before accepting any “juicy” consolidation offer be sure to clearly read the terms.

• Loan Forgiveness, Cancellation, Discharge, Reduction Scam: This is the worst type of student loan scam because it deceives you into thinking your debt has been settled when it hasn’t. Every borrower would surely love to see their debt erased, but here’s the problem, why should you pay a debt forgiveness fee to a third-party that isn’t the lender? For every loan taken, there must be a repayment even if the debtor dies. There are only a few cases where a lender issues loan forgiveness like the current COVID situation.

With the strict laws that govern loan forgiveness, cancellation, discharge, reduction, or elimination, it is very obvious that a third-party who tries to help you achieve any of these is a scam. Student loan debt settlement cannot be negotiated by a third-party organization. There are two common ways to spot this type of companies: companies that ask you to send them a huge amount of money to settle your debt and companies who ask you to send your student loans directly to them. The implication of falling for this type of scam is that the student will be left with additional interest and lateness fees. It could also affect their credit scores if the lender reports to the credit bureaus.

On the other hand, there is actually such a thing as the Public Service Loan Forgiveness which applies to certain types of federal loans in very rare cases. There are also other loan forgiveness programs like the Teacher loan forgiveness, the Perkins loan cancellation, and the Student loan forgiveness which happened under the COVID-19 relief for students.

In conclusion, the first step to avoiding student loan scams is by avoiding companies that pop up in search engine ads or companies that approach you to use their platforms. Even if such companies look convincing enough, personally run a background check on them for reviews that would help you.