New data show student loan borrowers who pay for help shell out more than $600 on average for federal services they can get for free.
They capitalize on confusion.
Student debt relief companies collect fees to enroll borrowers in federal consolidation, forgiveness and repayment plans, appealing to millions of student loan borrowers itching to shed their debt. The upfront and monthly charges cost borrowers hundreds or even thousands of dollars — a price tag that becomes infuriating to borrowers who later realize they can sign up for those programs for free through their loan servicers.
Debt relief practices are legal in theory; some liken it to paying a tax preparer to do your taxes. But “student debt relief companies can easily cross over into practices that violate key consumer laws,” according to a 2013 report by the National Consumer Law Center. With upfront fees, misrepresentation of federal programs and aggressive advertising tactics, student debt relief companies aren’t curbing borrower confusion, by and large; they’re adding to it.
“It’s very difficult to tell the difference between legitimate information providers and for-profit companies,” says Noelle Griffis, a 34-year-old student loan borrower from New York. She reports getting phone calls and direct mail from companies offering loan consolidation and forgiveness and seeing advertisements for such companies on social media.
Griffis is one of 6,363 respondents from a July survey by NerdWallet and Student Debt Crisis, a nonprofit higher education advocacy group. The survey asked respondents about their experiences with companies charging for student loan consolidation, forgiveness and other forms of debt relief. The respondents are part of Student Debt Crisis’ email list of around 800,000 people and are not necessarily a representative sample of the U.S. population.
It’s very difficult to tell the difference between legitimate information providers and for-profit companies.
Noelle Griffis – 34-year-old student loan borrower from New York
Prior to the survey, there was almost no data about these companies, how widespread they are and how much they charge borrowers. Here’s what the survey found:
- Companies charging for student loan debt relief, forgiveness and consolidation are pervasive: 60% of respondents say they’ve seen advertisements for such companies and 44% say a company has contacted them directly. Respondents identified roughly 200 student debt relief companies.
- About 9% say they’ve paid for a student debt relief service. The average amount spent per borrower was $613, though some respondents couldn’t recall how much they paid.
- Respondents with the highest amounts of student debt — $75,000 or more — are more aware of their free options for managing that debt compared with respondents with the smallest debt loads.
- Results varied by race: 15% of black respondents say they’ve paid for student debt relief services, compared with 13% of American Indian respondents, 11% of Hispanic respondents, 9% of white respondents and 8% of Asian respondents.
The student debt relief industry is addressing a situation created by a convoluted federal student loan system. This system is ostensibly designed to help borrowers, with several programs aiming to do so: Income-driven repayment plans cap borrowers’ monthly payments at 10% to 20% of their income; forgiveness programs cancel qualifying borrowers’ remaining debt after they make on-time payments for a certain period of time; and deferment and forbearance temporarily postpone borrowers’ payments. Depending on the type of federal loans they have, borrowers may have to consolidate their loans before they can qualify for these programs.
Loan servicers are the go-to contact for borrowers to make payments, access repayment plans and forgiveness programs, and ask questions about their loans. But “feedback has shown borrowers are not always familiar with their servicer,” a 2015 Government Accountability Office report says. The government doesn’t service its own loans; private companies do, including common servicers such as FedLoan Servicing, Great Lakes, MOHELA, Navient and Nelnet.
The Department of Education plans to streamline the system with a new government-run portal that all borrowers can access to make payments and sign up for repayment plans. The new portal will be designed to “avoid confusion about who is servicing [borrowers’ loans],” according to a 2016 department blog post. But in the meantime, the complicated system can confuse even the most diligent borrowers and drives some to resort to paying companies for help.
Take Selina Leonard. After graduating from the University of Illinois at Chicago in 2015 with $60,000 in debt and a job making $11 an hour, she knew she wouldn’t be able to afford her monthly federal student loan payments. So she filled out an application for income-driven repayment, faxed it to her federal student loan servicer and waited.
She heard nothing. When she emailed to follow up, she says, she was told that her application had not been received.
So when her boyfriend’s mom told her about a company that could help lower her monthly payment, she decided to call — even though, she says, she was skeptical.
“I knew the company was trying to screw me out of money with the huge fee,” she says. “But I was so desperate for help with my loans that I went along with it anyway.”
The pervasiveness of student debt relief companies
Student debt relief companies come on strong, according to survey respondents. Sixty percent cited seeing ads for such companies, and 44% say the companies contact them directly. Respondents named at least 200 different companies, says Natalia Abrams, executive director of Student Debt Crisis. More than a dozen debt relief companies were mentioned multiple times, Abrams adds.
“I am bombarded with these advertisements and it felt especially invasive when I received a text message,” says Deborah Jacobson, a 33-year-old respondent from Salt Lake City, Utah.
Targeted ads for student debt relief abound on social media and online search engines, like Google, respondents say. Many also report hearing about debt relief companies on television and the radio. According to a 2015 Consumer Financial Protection Bureau report, “Borrowers in distress [are] particularly susceptible to marketing by these debt relief companies.”
The ads promise lower monthly payments, loan forgiveness, consolidation and refinancing, many survey respondents say, although even with federal programs, forgiveness isn’t guaranteed — it depends on factors including the borrower’s profession, amount of debt, income and family size. A smaller number of respondents say they’ve seen ads promising to return their loans to good standing and offering monthly loan monitoring. Many also report seeing ads for “Obama’s new loan forgiveness program” — a program that doesn’t exist.
In addition to advertising, debt relief companies hire salespeople to contact borrowers directly. One company recruited sales representatives through a Craigslist post in August, promising a “generous commissions structure (and boy do we mean generous!)” plus “extra daily, weekly and monthly cash bonuses!” Another post on Craigslist this month touted “an opportunity to make six figures a year while doing this cakewalk student loan sale.”
When borrowers hear from debt relief companies directly, the contact can feel near-constant. Almost a third of respondents say they get calls, text messages, emails, snail mail and direct messages on social media from debt relief companies monthly, and more than a fourth say they are contacted on a weekly basis. Several respondents say sales representatives asked for personal information over the phone, including Social Security numbers and account passwords.
“I was very uncomfortable and would not give my Social Security number,” says Amanda Burns, a 37-year-old respondent from West Haven, Connecticut. “The man tried to convince me to share my information by saying they work with the Department of Education and the information is secure.”
Student debt relief companies are not affiliated with the government. Some imply that they are by using the Department of Education’s logo or official-sounding words like “national” in their names. The department has sent cease and desist letters to at least five companies that claim to be affiliated with the government: The Student Loan Project; Perfect Privacy LLC, which manages SL Programs Student Loan and Debt Consolidation; Abuv Media, which manages Affordable Colleges Online and Accredited Schools Online; MC Business Group LLC, which manages Loansforgiveness.org; and Student Loan Consultants of America. The department is collecting additional names of companies through its Federal Student Aid Feedback System, says department press secretary Dorie Nolt.
The price of student debt relief companies
Nine percent of survey respondents say they’ve paid for student loan debt relief, forgiveness or consolidation, and 7% say they’re not sure if they’ve paid for those services. Student debt relief companies often impose fees upfront and many companies also charge monthly.
Respondents who’ve paid reported spending an average of $613 on student debt relief services. Twenty percent say they paid a total of $501 to $750, 18% paid $301 to $500, 15% paid $1,000 or more and 12% paid $101 to $300. Twenty percent say they don’t know how much they paid.
“I realized it was fraud and called to cancel,” says Joni Geary, a 34-year-old respondent from Clawson, Michigan. “However, they still took $200 from me and wouldn’t return it, stating that there was no refund even when I never signed their contract.”
Overall, borrowers who paid for student loan help weren’t satisfied with the results. Sixty-five percent say the services did not improve their student loan situation.
“This company told me they could analyze and find flaws in the ways the loans were written that would reduce the loan amounts and the payments,” a 66-year-old respondent from New Mexico says. He says he paid the company more than $3,000. “When I asked for progress reports, they were vague or evasive.”
However, 35% of respondents say the company’s services did help their student loan situation.
“I didn’t feel like I was being manipulated,” a 33-year-old borrower from Ohio says. “They were very upfront about my situation and kept me in the loop of what was going on.”
Student debt relief and race
Survey respondents had the option to indicate their ethnicity or race, and about 71% chose to specify it.
Of those who did, 15% of black respondents say they’ve paid for student debt relief services, compared to 13% of American Indian respondents, 11% of Hispanic respondents, 9% of white respondents and 8% of Asian respondents.
As NerdWallet has previously reported, black students take on more student debt compared to the average U.S. student.
Education about student loan options
The survey also asked questions to gauge how aware borrowers are that they can consolidate their federal student loans for free through the Department of Education. For example, it asked respondents to answer “true” or “false” to the following statement: “Anyone who wants to consolidate their qualifying student loans can do it for free.”
That statement is true, and 65% of all respondents answered it correctly. Those with the highest debt loads were more likely to respond correctly: 74% of respondents with $75,000 or more in student loans outstanding answered that the statement is true, while 54% of respondents with $5,000 or less in student loans said it was true.
But even when borrowers are aware of legitimate options, the stress of student debt can make them inclined to sign up for a debt relief service anyway.
“Even though I’m pretty sure it’s a scam, part of my brain wants to talk to them in hopes they know something I don’t,” a 35-year-old respondent from Ohio says.
What borrowers should know
The survey overwhelmingly showed that respondents are confused about their student loans. Here’s what borrowers should know:
HOW TO TRACK FEDERAL STUDENT LOANS
Student loan servicers are private companies that collect payments for federal student loans on behalf of the government. Borrowers who are unsure of who their loan servicer is should look up their loans on the Federal Student Aid website. There, borrowers can also see the types of loans they have, the amount they owe for each loan, their interest rates and the status of their loans.
Even though I’m pretty sure it’s a scam, part of my brain wants to talk to them in hopes they know something I don’t.
35-year-old respondent from Ohio
HOW TO GET LEGITIMATE LOAN CONSOLIDATION OR FORGIVENESS FOR FREE
Borrowers can consolidate their federal loans, switch to an income-driven repayment plan and sign up for forgiveness programs for free through their loan servicer.
Many borrowers confuse federal loan consolidation with student loan refinancing. Consolidation simply means combining multiple loans into one. Depending on the type of federal loans they have, borrowers may need to consolidate in order to be eligible for an income-driven repayment plan or forgiveness program. But consolidating a federal loan doesn’t lower its interest rate — consolidated loan interest rates are a weighted average of the previous loan rates. Some borrowers can lower their interest rates by refinancing through a private company if they have a steady income and decent credit.
Income-driven repayment plans cap borrowers’ monthly payments at 10% to 20% of their income and forgive any remaining loan balance after the borrower makes payments for 20 or 25 years, depending on the plan. Borrowers will, however, have to pay income taxes on the forgiven loan amount. But while income-driven plans lower borrowers’ monthly payments, they increase the amount of interest borrowers pay throughout the life of the loan.
Borrowers can also get federal loan forgiveness if they have Perkins loans, work for the government or a nonprofit and make payments for 10 years, or teach in certain school districts and make payments for five years.
HOW TO SPOT A DEBT RELIEF COMPANY
Here’s how borrowers can tell if they’re dealing with a student debt relief company:
The company charges for its services. Options through the Department of Education and federal student loan servicers are free.
The company asks for the borrower’s personal information. Borrowers should not give a third-party company access to their online federal student loan account, share their Social Security number or sign a power of attorney giving the company control of their student loans.
The company implies that it’s affiliated with the Department of Education. Some companies’ websites try to convince borrowers that navigating federal student loan programs is too complicated to do alone. Although the system can indeed be complicated, borrowers can sign up for consolidation, repayment plans and forgiveness programs on their own. Borrowers should call their loan servicer if they have questions; it’s part of a loan servicer’s job to help borrowers understand their options.
WHAT TO DO IF A BORROWER HAS ALREADY PAID A DEBT RELIEF COMPANY
Borrowers who are already paying a debt relief company don’t have to continue to do so. They should notify their loan servicer immediately and ask their loan servicer to revoke the debt relief company’s rights to their account, says Persis Yu, director of the Student Loan Borrower Assistance Project at the National Consumer Law Center. Going forward, borrowers should make payments directly to their loan servicer.
If the borrower signed a contract pledging to pay the debt relief company for a certain period of time, the company could “go after” the borrower for a breach of contract if the borrower stops paying, Yu says. But that situation is unlikely to come about, she says, and the borrower would “probably have a defense.”
NerdWallet analyzed 6,363 survey responses. The survey was administered via email — 6,230 of the respondents received the survey through an email from Student Debt Crisis, and 133 received the email through Higher Ed, Not Debt, a student loan debt advocacy group partnered with Student Debt Crisis.
Due to the nature of the survey structure, not every borrower answered every question.
RESPONDENT STUDENT DEBT CHARACTERISTICS
Of respondents who provided their age, the average age of respondents is 48.
There were respondents from all 50 U.S. states, Washington, D.C., American Samoa, Guam, Puerto Rico and the Virgin Islands.
Of the 80% of respondents who answered a question about race and ethnicity, 50% of respondents were white, 12% were black, 6% were Hispanic, 5% were of multiple ethnicities, 4% answered, “prefer not to say,” 2% were Asian and 1% were American Indian. 20% of respondents did not answer this question.
Respondents’ estimated yearly income:
25% earn $25,001 to $50,000
21% did not indicate their income level
17% earn $50,001 to $75,000
14% earn $10,001 to $25,000
8% earn $75,001 to $100,000
6% earn $1 to $10,000
4% earn $100,001 to $150,000
4% earn $0
1% earn more than $150,000
- Of respondents who borrowed student loans, 52% have federal loans, 37% have both federal and private loans, 8% aren’t sure and 3% have only private loans.
- Of respondents who borrowed student loans, 45% are currently in repayment, 29% are in deferment or forbearance, 9% are delinquent, 8% have already paid off their loans, 6% are in default and 3% aren’t sure about the status of their loans.
- 85% of respondents borrowed student loans:
- 34% of these respondents borrowed more than $75,000
- 16% of these respondents borrowed between $50,001 and $75,000
- 16% of these respondents borrowed between $35,001 and $50,000
- 14% of these respondents borrowed between $20,001 and $35,000
- 10% of these respondents borrowed between $10,001 and $20,000
- 4% of these respondents borrowed between $5,001 and 10,000
- 3% of these respondents borrowed between $1 and 5,000
- 3% of these respondents aren’t sure how much they borrowed