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Why Massachusetts is creating its own student debt counseling unit

Massachusetts Attorney General Maura Healey is launching a student loan assistance unit. (AP Photo/Steven Senne)
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Despite the millions of dollars the federal government pays student loan servicers to guide borrowers in repaying their debt, states are creating hotlines to help people navigate the system, raising questions about the effectiveness of the contractors.

Massachusetts Attorney General Maura Healey on Tuesday said her office is launching a unit to help borrowers catch up on their student loans, apply for federal programs that cap payments to a percentage of their income and answer questions about their debt — all of the things that servicers are supposed to do.

Healey said her office had to take action because of the rise of scam artists promising to lower debt payments in exchange for hundreds or thousands of dollars. Not only can borrowers get the same help for free from the government, but many of these companies will collect money even if they know there is nothing that can be done to help.

“Because student loan servicers are failing and not doing what they’re supposed to do to help students with their loans a new cottage industry has crept into the market,” Healey said, during a press conference Tuesday. “These are companies that target vulnerable students and market themselves as being able to help students with their debt.”

During the press conference, Healey said her office has banned two debt relief companies from operating in Massachusetts as part of separate settlements. Student Loan Processing and Direct Student Aid agreed to pay $56,000 and $40,000, respectively, over allegations of charging illegal upfront fees, aggressive marketing and misleading people about their ability to lower debt payments. Requests for comment from both companies were not immediately returned.

The attorney general said advertisements were designed to give the false impression that the companies were connected to the federal government. At least 200 students say they were duped by the companies, with some paying more than $1,000 simply to have them complete applications.

This is not the first time a state attorney general has established a student loan unit out of frustration with the shortcomings of federal servicers. New York, California and Illinois all have some sort of dedicated division or hotline to help state residents navigate the system and avoid being preyed upon by unscrupulous scam artists.

In June, Illinois Attorney General Lisa Madigan called on the Department of Education to create a training and certification program for credit counselors, similar to what the Department of Housing and Urban Development has for housing counselors. In that way, people having a hard time repaying student loans can find trusted advisers in their states, rather than turning to scam artists.

[Student debt relief scams are on the rise. Here’s how this government official plans to stop it.]

The activism of state prosecutors is ultimately an indictment of student loan servicers. Companies such as Great Lakes, Nelnet and Navient are paid by the federal government to collect payments, answer questions and help people avoid defaulting on their loans.

Tens of thousands of people, nevertheless, have complained to the Consumer Financial Protection Bureau of servicers losing paperwork, processing payments too slowly or sending inaccurate billing statements. All of those practices are reminiscent of the problems in mortgage servicing that led to consumer protection reforms.

[The surprisingly high number of people who are behind on their student loans]

Student Loan Servicing Alliance Executive Director Winfield Crigler argues that servicer outreach to borrowers is “paying off” as millions of borrowers are now enrolled in income driven repayment plans.

Michele Streeter of the Education Finance Council, a trade group representing nonprofit and state-based student loan servicers, said her organization “acknowledges that the servicing status quo is failing some borrowers.” She said a part of the problem is the way the government awards servicing contracts, favoring larger companies over the smaller outfits that her group represents.

“Allowing servicers to compete for allocation based entirely on their performance — their record in keeping all borrowers engaged, current, and successful — would improve the quality of servicing across the board, and keep more borrowers from seeking alternative solutions that are not in their best interest,” Streeter said, in an e-mail.

The Department of Education will be rebidding its servicer contracts in the coming year with greater emphasis placed on outcomes and customer service. 

To be sure, debt consulting is not illegal. There are reputable companies in the market that are upfront about the limitations of their services. These companies by law must renegotiate, settle or reduce at least one debt before collecting fees for the service. They are also not allowed to promise results that they have no way of achieving, such as quick relief from default or wage garnishment. Yet many companies skirt the law.

During Tuesday’s press conference, Boston University graduate Amelia Manni said, in 2014, student debt relief company United Advisor Group promised to lower her payments and in 10 years get rid of the $100,000 debt she and her mom had amassed. Manni was required to pay a few hundred dollars as a down payment, monthly loan payments and monthly service fees.

“It sounded amazing,” Manni said. “We were just looking to make things easier financially.”

When she tried to apply for new loans to pay for graduate school four months later, Manni learned that none of her payments were going toward her debt. The debt relief company had taken over her account, which meant Manni was not receiving any e-mails or calls about her missed payments. She said United, which did not immediately respond to requests for comment, ignored her calls. That led Manni to contact the attorney general’s office, which in two weeks recovered her $1,500.

“Right now the federal government is failing, loan servicers are failing. It’s time for us to step in, fill this void and do what we can to help students and families,” Healey said.

At the federal level, the CFPB shut down student debt relief company College Education Services and separately filed a lawsuit against Student Loan Processing last year for illegally charging upfront fees and deceptive marketing. The bureau issued a consumer advisory at the time warning of signs that a company offering student loan debt relief may be a scam.

People should avoid companies that require upfront payment, bank account information or access to their federal student aid PIN, an ID that would give a company power to take actions on a consumer’s behalf. The advisory is similar to one issued by the Department of Education.

Government agencies, including the Federal Trade Commission, say they have noticed a spike in student debt relief complaints in the wake of the federal government’s expansion of repayment options and forgiveness plans. In some cases, the same companies accused of mortgage relief fraud have reinvented themselves as student debt relief advisers, according to the FTC.

Want to read more about the student loan servicing? Check out these stories:

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