Scam Alert: Debt Relief Plans

July 31, 2013 by Ashley Tate

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The saying goes, if an offer sounds too good to be true, it probably is. And that’s especially accurate if you receive a proposition from a non-government entity that promises to help get rid of your student debt.

Borrowing for higher education has now surpassed $1 trillion, according to the Consumer Financial Protection Bureau. Additionally, a report from the credit agency TransUnion found that student loan balances increased 75% in the past five years, with the average borrower owing a balance of $23,829. In response, so-called debt relief companies have sprung up—targeting recent college graduates and distressed borrowers.

But these debt relief organizations may not be what they claim to be, according to the National Consumer Law Center (NCLC), a non-profit, which analyzed numerous programs. Not only do the plans have a lot of problems, but also they possibly violate both federal and state consumer laws.

The NCLC uncovered dubious business practices, including charging of steep fees. One of these organizations charged a whopping $445 to simply enroll participants in a government program. And if that wasn’t enough—consumers were also billed an additional $39 each month. Enrollment fees with other companies were found to be as high as $1,600, monthly fees for “on-going services” ranged from $20 to $50, and all of the charges were either not disclosed or buried in the agreement’s fine print.

The NCLC also discovered that many of these companies use the same language as legit government-run debt repayment plans, making it easy for consumers to confuse them with programs run by the U.S. Department of Education. In many cases, the fraudsters didn’t provide additional debt relief services. Instead, they only signed up participants in federal programs—which are free and allow consumers to enroll themselves—but charged exorbitant fees in exchange.

And if that wasn’t enough, the scammers typically offer only loan consolidation, which many experts say is not the right move for many borrowers. (And in some situations, borrowers aren’t even eligible to consolidate their loans.)

So what’s someone with an unbearable amount of student debt to do?

The smartest move is to contact the Federal Student Aid Office. The organization will help you figure out what types of repayment plans you qualify for, including those that are income-based or pay-as-you-earn—all without charging you a cent. Or, you can work with a credit counselor, who can lay out your options for dealing with your debt. (Click here to find one.) And perhaps most importantly, avoid signing up for any program before you’ve read all the legalese. Otherwise, it’s possible that you’ll end up with even more debt than you initially started with.