But instead of renegotiated payment plans, the scammers pocket fees collected for their bogus services.
The Federal Trade Commission recently filed a lawsuit against a debt settlement company that the agency said bilked more than $23 million from thousands of borrowers by taking illegal upfront fees and falsely stating that they could lower their loan payments.
A federal court in California agreed with the FTC complaint and temporarily shut down the operation, which used a number of trade names, including Federal Direct Group, Mission Hills Federal and The Student Loan Group.
On the Mission Hills website, consumers are now greeted with a message that a receiver has taken control of the company. Borrowers are told to immediately contact their student loan servicer to determine the status of their loans.
Looking at the FTC’s complaint, I saw that it described an all-too familiar scheme. A company says it can reduce a person’s debt because of its negotiating prowess. But it does nothing, or, at the very least, it offers services that the borrower can get free through the Department of Education.
Government agencies and consumer advocates try to warn people about this type of scam, often pointing out that, “If it’s too good to be true, it probably is.”
Here’s the problem with this advice: If you’re drowning in debt, you want to believe there’s a savior with a lifeline.
So, like a surgeon opening a patient during an operation, let’s look at the gory guts of how student loan debt-relief scams often work.
The claims: The deception comes in at least three ways.
● You are enrolled in a plan that claims it will reduce your monthly payments to a much lower amount or that your loan balances will be forgiven in whole or in part.
● You are promised that a portion of your monthly payments will be applied toward your loans. In the recent FTC case, one person was told that $10 of the $51.67 monthly payment would be a management fee, and that the rest of the money would be used to repay the student loans.
● The company claims it will be taking over the responsibility for the servicing of your student loans. But the FTC said this is often a trick to get borrowers to divulge their federal financial aid account username and password. Upon gaining access, your contact information might be changed so the company can intercept communication from your loan servicer. It can take months or years before you discover that your student loans aren’t being paid.
The fees: The debt settlement company will ask for one or more initial payments to get started on your case (more to come on how that’s illegal). As an example, in the FTC’s recent complaint, the agency alleged that the debt settlement companies charged one to three “initial” fees that could run people between $100 and $500. But then consumers were hit with a monthly payment in another amount that would range from $50 to $200. In total, some borrowers ended up paying as much as $7,000 for debt settlement services they never received, the FTC claimed.
The deception: Maybe one payment on your student loan is made and then stopped. Or, the company — without your knowledge — got you a deferment or forbearance, which increases the amount owed. It’s possible the debt settlement company can get you a lower monthly payment through one of the federal government’s income-based repayment plans. But this is achieved by falsifying your income and dependent information.
If you are seeking help from a debt settlement company, here are three signs it’s probably running a scam.
● The company requires you to pay in advance of services, which is illegal under the Telemarketing Sales Rule. A debt settlement company cannot collect any fees from you before you have settled or otherwise resolved your debts.
Don’t pay for what you can get free. Go to StudentAid.ed.gov/sa/repay-loans , which is the same site the debt-relief companies will use, to apply for an applicable income-based or forgiveness program.
● The company has a seal or logo that makes it appear as if it’s affiliated with the government.
● You are required to provide your Federal Student Aid Identification — referred to as “FSA ID” — which is the username and password you use to log on to DOE student aid websites. Do not give this information to anyone.
The FTC has set up a dedicated website for student loan information, which includes a section on debt relief scams. Go to ftc.gov/studentloans.
I know you need a break from your crushing student loans. But if you sign up with a sham company, you’ll get more pain than relief.