As college costs soar, U.S. student loan debt is increasing with it. American undergraduates in 2018 borrowed 40% more than students did a decade ago. With over 45 million Americans in the thick of the student debt crisis, some estimate that the class of 2018 won’t be able to retire until they’re 72 . And as the student debt bubble grows, so does the number of predatory companies running student debt scams.
Researchers have identified over 130 companies that operate in this manner. They run the gamut—from offering student loan forgiveness scams to straight up stealing your hard-earned dollars. Some can even lead to your debt increasing, which is a hard no.
There are plenty of authentic refinancing and consolidation options, such as income-driven repayment plans , that might help you in the long run. But unfortunately, there are also a slew of bad actors. Luckily for you, we’ve laid out some typical student loan scams as well as seven red flags that can help you suss out if a company is legitimate or not.
The Typical Student Loan Scams
As they say, there are a few ways to shear a sheep, and for fraudulent companies, there are a few ways to trick you out of your moolah. Those under stress from student loans can feel compelled to go to extreme measures to get rid of their debt, which can make them more susceptible to predatory tactics. So buckle in.
One typical scam is a student loan assistance company that advertises loan forgiveness or lower payments in exchange for an upfront fee, followed by a few more payments.
Unsuspecting people pay and then six months later, the firm will shut down. This one isn’t as insidious as some other common scams, but you could still be out some money. And if you’re part of the college debt crisis and thousands of dollars in debt, that isn’t where you want to be.
Another common tactic is to offer federal student loan consolidation for a fee. Student loan consolidation is always available for free from the Department of Education. Or you could refinance your federal student loans with a reputable lender. But it is important to remember that if you refinance your student loans with a private lender, you will lose access to federal benefits such as student loan forgiveness, income-driven repayment plans, and deferment.
If you’re going to refinance your student loans, however, it’s a smart idea to do your due diligence before signing on with a lender (of course, keeping in mind that refinancing to private loans, even with reputable lenders, can strip you of certain federal benefits).
7 Red Flags for Student Loan Scams
In the midst of the current student loan debt crisis, there’s tons of confusing information on the internet. How can you suss out a student loan debt scam? Here are a few tips to help you spot potential scammers:
1. You get requests for sensitive information over the phone.
A legitimate private lender will need your Social Security number and other info to process your refinance application, but they are unlikely to cold call you. If you’re working with an online lender, do a little homework by researching the company and reading consumer reviews.
And if you’re really unsure, you can contact your state attorney general’s office to see if complaints have been lodged against the company. The rule of thumb here? Never share any personal information until you are 100% certain you are dealing with a legitimate lender.
2. The company requires direct payment immediately.
A major indication that you’re dealing with a student loan scam is the requirement of an upfront fee. Once they get the fee, many scam companies simply take your money and disappear, leaving your loans in forbearance (or worse, default), and you none the wiser. Debt counseling firms are not allowed to charge you any fees until after they renegotiate, settle, or reduce at least one debt for you. Yes, a reputable lender will charge interest on your loan, but they will not ask you for cash upfront.
3. You are promised immediate loan forgiveness.
This is a classic case of too good to be true. Student loans are notoriously difficult to shake, even if you file for bankruptcy. There are a few situations that can qualify you for federal student loan forgiveness—for example, if under the Public Service Loan Forgiveness Program (PSLF), you’ve worked for an eligible employer, are on an income-driven repayment plan, and have made 10 years of qualifying payments.
So immediate loan forgiveness is likely a ruse. While it would be nice for all your student loans to be forgiven in an instant, this is unfortunately a pie-in-the-sky dream.
But if you do qualify for a federal loan forgiveness program, there’s no need to have a third party negotiate for you. Simply call your loan servicer for instructions on the process—free of charge. Just keep in mind that only 1% of those who have applied for PSLF have been approved.
4. You are encouraged to pay off your student loans to a third party directly.
This is just shady. Why would you want someone else making payments on your behalf? It begs the question: What are they hiding?
5. The company claims to be working with the U.S. Department of Education.
Some private lenders misrepresent themselves by using names, seals, and logos that give the impression they’re affiliated with the federal government’s student loan programs (hello, Obama Forgiveness Plan). However, the Department of Education does not solicit people to borrow money; so if it sounds like a sales pitch, it’s not coming from the government.
The Department of Education doesn’t work with private loan consolidation companies, but it does work with private loan servicer companies. A servicer collects payments and handles other services on the loan you already have, but it doesn’t offer private loan consolidation. The government offers its own Direct Consolidation Loan program (by application) for free, so if anyone tries to sell you this option, they are pulling one over you.
6. Someone is pressuring you to sign up under time constraints.
No legitimate loan program is only available for a short period of time. If they are overly insistent, and don’t go for an offer to call them back directly, this could be a red flag.
7. The company is charging a consolidation fee.
This is where things can get a little murky. As noted above, there are legitimate private companies that can help you consolidate and refinance student loans for a fee. As long as they don’t charge you any fees until refinancing has occurred, they’re most likely operating legitimately.
But be cautious. Again, if you want to apply to consolidate federal student loans through the Direct Consolidation program it’s a free process—so you don’t need a company to do it for you.
If you want to consolidate and refinance your private student loans on the other hand, know that the private company is probably refinancing your current loans into one new private loan. In that case, be sure to check the interest rate, any fees, and read the fine print to see if the new deal is actually better than your old one.
Is Consolidating Your Student Loans the Right Decision for You?
Spotting a student loan scam isn’t always easy, especially when companies go out of their way to convince you they’re legit. If your gut tells you a deal is too good to be true, then it probably is.
When choosing between a Direct Consolidation Loan (for federal student loans) and student loan refinancing (for federal and/or private loans), it’s worth taking some time to learn about all your options, as the terms and potential outcomes (savings vs. interest spend) can be very different. Check out our quick guide to student loan consolidation vs. refinancing for more details.
Refinancing student loans can be a great way to make payments more manageable, depending on what kind of student debt you have. However, not all refinance options are created equal. It’s important to do your homework before deciding to consolidate and/or refinance your student loans, because your individual circumstances will dictate whether consolidation or refinancing is right for you:
Direct Consolidation Loans from the federal government can only be used to consolidate federal loans. It’s essentially a way to package multiple loans into one, giving you a new, fixed interest rate that’s a weighted average of all your federal loans (rounded to the nearest eighth of a percent) and, sometimes, a longer term. This means your monthly payment amount doesn’t necessarily go down, nor does your interest rate—it just makes things more straightforward.
Refinancing means consolidating all your student loans—regardless of whether they’re federal or private. You refinance with a private lender, and typically do so if you think you might qualify for a lower interest rate. Refinancing may allow you to pay all your student loans off at a more competitive interest rate, which can save you over the life of your loan.
You can also typically change the term length on your refinanced loan—a longer term length could lower your monthly payments, while a shorter term length could help you pay off your student loans much faster.
In order to know how much you could gain from refinancing, you can start by verifying how much you owe and what your interest rates are across both private and federal loans. Once you know that information, you can use this student loan refinancing calculator to see your estimated savings.
And, again, it is important to remember that if you choose to refinance your student loans with a private lender you will lose access to federal benefits such as student loan forgiveness, Direct Consolidation Loans, and income-driven repayment plans.
SoFi is a leader in the student loan space—offering both private student loans to help pay your way through school or refinancing options to help you pay off your loans faster. See your interest rate in just a few minutes. No strings attached.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF DECEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE
FOR MORE INFORMATION. Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.