Navigating the Maze: How to Avoid Education Loan Scams

Paying for school can be expensive, and many people need to take out loans to cover the cost. Dealing with the debt and repayment options can be confusing, making borrowers vulnerable to scams. The rise of student loan debt relief scams has been prominent in recent years, harming student loan borrowers. It's tempting to believe a company that claims they can eliminate your debt, but it is crucial to be vigilant and informed. This article will help you understand how student loans work and how to avoid scams.

Understanding the Landscape of Financial Aid

There are several types of financial aid that can help you pay for your education beyond high school. Those include grants and scholarships, federal work-study jobs, and student loans. If you’re trying to decide whether a financial aid offer will cover enough of the costs to make attending school affordable, the CFPB’s financial aid offer tool can help.

Grants and Scholarships: Free Money

Grants and scholarships are free money that you don’t have to pay back. If you qualify for these, they’re the best choice for financing your education. Many grants and scholarships require that you complete the Free Application for Federal Student Aid (FAFSA®) form.

There are many places to find grants and scholarships:

Department of Labor’s free scholarship search tool
Federal agencies
Your state’s educational agencies
Searches online and at your library
Foundations, religious or community organizations, local businesses, or civic groups
Organizations related to your field of interest, like professional associations
Ethnicity- and heritage-based organizations
Your or your family’s employer

Federal Work-Study Program: Earn While You Learn

Federal work-study jobs are another way to help pay for college. Work-study is a need-based grant that requires you to work part time while you’re in school. To qualify for work-study, fill out the FAFSA® form to see if you meet the needs-based criteria of the program. You’ll get paid only for the hours you work - and the amount you earn can’t exceed your total Work-Study award.

Student Loans: A Necessary Evil?

Student loans, especially federal student loans, offer important benefits and protections for borrowers, such as fixed interest rates and flexible payment plans. These types of loans include:

Direct Loans: These can be need-based and subsidized (the government pays the interest while you’re in school) or not need-based and unsubsidized (the interest accrues while you’re in school).
Direct PLUS Loans: Graduate or professional students, and parents of dependent undergraduate students, can use these to help pay for college or career school. PLUS loans can help pay for educational expenses not covered by other financial aid.

Two types of federal loans that are no longer available, but people might still be repaying:

Federal Family Education Loans (FFEL): These were loans made by private lenders and backed by the federal government.
Federal Perkins Loans: These were low-interest federal student loans that were for undergraduate and graduate students with exceptional financial need.

Private loans, sometimes called “alternative loans,” are offered by private lenders, like banks and credit unions. They are not backed by the federal government and do not include the benefits and protections that come with federal student loans.

Applying for Financial Aid: The FAFSA® Form

The only way to apply for federal student aid is by filling out the FAFSA® form. It’s free to apply. Fill out your FAFSA® form at fafsa.gov the year before you start college, university, or career school and at the start of every year you’re in school. Many states and colleges use your FAFSA® data to decide whether you’re eligible for aid from your state and your school. Some private financial aid providers may use your FAFSA® information to figure out whether you qualify for their aid, too.

When you fill out your FAFSA® form, you’ll also create your Federal Student Aid Identification, known as your FSA ID. Only you are able to create and use your FSA ID. Don’t share your FSA ID with anyone, no matter who asks or what they say. Dishonest people could use your FSA ID to get into your account and steal your personal information. With your FSA ID, you can do things such as: access Department of Education websites, apply for income-driven repayment plans or loan consolidation, and complete other loan-related documents.

Repaying Your Loans: Understanding Your Options

Student loans are debts you have to pay back, even if you don’t finish your degree. But depending on your situation and the kind of loans you have, you might be eligible for a different repayment plan or loan forgiveness.

Federal Student Loan Repayment Options

The Department of Education has free programs that could help you repay your federal loans, including:

Income-driven repayment plans: These base your monthly payment on how much money you earn.
Deferment and forbearance programs: These let you postpone your payments, depending on the reason you can’t repay. In many cases, the interest might continue to accrue and increase the amount you’ll owe.
Loan forgiveness or loan discharge programs: These forgive or discharge some or all of your loans. You might qualify if, for instance, you work for a government or non-profit organization, if you become disabled, or if your school closed or committed fraud. Also, under certain income-driven repayment plans, any balance still owed after 20 or 25 years of payments is forgiven.

These options are free. Learn more at the Department of Education’s site StudentAid.gov/repay or by contacting your federal student loan servicer. Federal loans give borrowers various options to avoid default. If you fall behind on your federal student loan payments, there are steps to avoid default, limit the amount of late fees you need to pay, and get back on track.

Private Student Loan Repayment

Private student loans typically offer fewer options for repayment, loan forgiveness, or cancellation. To explore your options, contact your lender directly. If you don’t know who your lender is, look at a recent billing statement. Private loans generally offer borrowers fewer protections against default than federal loans. But if you do get behind with your payments, contact your lender to see what your repayment options may be. It may also be helpful to review your private loan contracts carefully to better understand your rights if you do go into default on your loans.

Income Share Agreements (ISAs): An Alternative?

If you’re looking for an alternative to student loans, you might hear about income share agreements (ISAs). When you enter an ISA, your school agrees to cover your tuition - and sometimes your living expenses - during college. In exchange, you agree to pay the school a percentage of your income for a set number of years after you graduate or leave the school. But an ISA may end up costing you much more than a student loan and won’t have the same protections as federal student loans.

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To decide if an ISA is right for you, consider these questions:

What are the terms of the ISA? Before you agree to an ISA, clarify the percentage of future income you’ll be expected to pay, and how long you’ll be required to make your payments. Keep in mind that because your payments will be a percentage of your income, the more you earn after leaving school, the more expensive the ISA will be. ISAs are usually offered by the semester or school year, so review these terms every time you take on an ISA. For example, during your first year of school, your rate could be five percent of your future income; the next year, it could increase to ten percent. If the terms become too expensive, consider looking into other financial aid options. Remember: whether or not you graduate, you’ll have to repay your ISA.
What might your expected income be? The repayment terms for ISAs will vary depending on your major, the likelihood you land a job in the field you want, and your expected income. Do some research on how easy (or hard) it is to land a job in your preferred field, what past graduates from your college have earned in that field, and how much someone with your planned career could expect to earn. Use the expected income to estimate what your ISA might end up costing you overall. Make sure that you will be able to afford your other living expenses along with your ISA monthly payments even if you don’t land the job you want.
What happens if the payments are unaffordable? Unlike federal student loans, ISAs don’t have deferment or forbearance options if you’re unable to make your payments. Even if the ISA allows you to make reduced payments based on your income, the payments still may be difficult to comfortably afford. Some ISAs may not require payment if your income is below a certain amount, but others may make you keep paying no matter what your income is.
How do the costs of an ISA compare to the costs of student loans? In general, federal student loans will be the lowest cost option, but it’s important to compare all your options to know what works best for you. The two costs to focus on are your monthly payments and your overall costs. Both federal and private loans charge interest on the amount you borrow, which is the cost of borrowing money. Federal loans always have fixed interest rates, which means the amount you pay back generally won’t change (with some exceptions, like if you sign up for an income-driven repayment plan). In contrast, private loans may have variable interest, which means the amount you owe could change over time. Unlike a student loan with a fixed interest rate, your estimated ISA costs can vary significantly based on how much you earn in the future, which makes estimating costs difficult. Here are some scenarios to consider:
- How much would you pay if you were unemployed or underemployed?
- How much you would pay if you were making the average salary of someone in your field?
- How much you would pay if you were making a high income?

Each ISA and student loan you take out or agree to can have different terms. That means that semester to semester, or year to year, you’ll want to re-check these numbers before agreeing to a new ISA.

Loan Consolidation: Simplify or Complicate?

When you consolidate your student loans, you’re combining multiple loans into one loan. You might consolidate your loans to simplify monthly payments or to extend the repayment term to lower your monthly payment. When you consolidate your loans, you get a brand-new loan with new terms. Before you consolidate your loans, take your time. Find out what consolidating could mean for your specific situation. If you have private loans, talk to your lender. Some companies may offer to help consolidate your federal loans for a fee, but you don’t have to pay for this service. To consolidate your federal student loans with the federal government on your own, contact your student loan servicer directly.

When you consolidate your federal student loans, you’ll get a Direct Consolidation Loan with a fixed interest rate for the life of the loan. But it might not make sense to consolidate certain loans if, for example, they have unique deferment or cancellation rights that might be lost upon consolidation. Once your federal student loans are combined into a Direct Consolidation Loan, they can’t be separated again. So, consider the type of federal student loans you have and whether the reasons to consolidate outweigh the reasons not to consolidate.

Reasons to consolidate federal loans into a Direct Consolidation Loan:

Your repayment will be simpler. You’ll have a single loan with one servicer and just one monthly bill.
You’ll have more time to repay your loans. Consolidation can give you up to 30 years to repay your loan, which can mean a lower monthly payment. (But you’ll end up paying more in total.)
You’ll gain access to different repayment plan options. You might gain access to additional income-driven repayment plan options and Public Service Loan Forgiveness. (But not all federal loans will qualify. For example, the FFEL program is not eligible for this benefit.)
You can switch variable-rate loans to a fixed interest rate. This can give you more certainty about your monthly budget.

Reasons not to consolidate federal loans into a Direct Consolidation Loan:

You’ll pay more in the end. A longer time to repay your loans means more (but lower) monthly payments. That also means paying more in interest than you would without consolidating.
You might lose existing borrower benefits. Certain types of federal loans come with borrower benefits - like interest rate discounts, principal rebates, or some loan cancellation benefits - that you might lose if you consolidate.

Not sure about loan consolidation but having trouble making your monthly payments? Consider contacting your loan servicer about deferment or forbearance as options for short-term payment relief, or consider switching to an income-driven repayment plan.

Consolidating Your Private Loans

The federal government does not consolidate private student loans. Private lenders do. The lender might charge a fee to consolidate your loans, but avoid companies that tell you to pay up front. Consolidating private and federal loans turns all your loans into a private loan. That means you’ll lose federal repayment benefits and protections, like deferment and forbearance, and will no longer have access to income-driven repayment plans and potential loan forgiveness programs. Make sure you understand all the conditions of your consolidated loan before you agree to consolidate - especially if you have both private and federal student loans. Some debt relief companies and lenders offer to consolidate private and federal loans together. They offer one new loan to lower your monthly payments or interest rate.

How To Avoid a Student Loan Debt Relief Scam

Millions of people around the world have student loans and some have trouble making their minimum payment every month. There are many companies that claim to resolve the issue, saying they can help you pay your loans off quicker and cheaper. Some even go the whole nine yards and claim they can get your loans forgiven. As of 2019, these “illegal” companies have brought in just over $95 million, according to the Federal Trade Commission (FTC). You’ve probably seen ads from companies promising to help with your student loan debt. But know that there’s nothing a student loan debt relief company can do for you that you aren’t able to do for yourself for free. And some of the companies that promise relief are scams.

Here are some ways to avoid a student loan debt relief scam:

Never pay an upfront fee. It’s illegal for companies to charge you before they help you. If you pay up front to reduce or get rid of your student loan debt, you might not get any help - or your money back.
Don’t sign up for quick loan forgiveness. Before they know the details of your situation, scammers might say they can get rid of your loans. They might promise a loan forgiveness program that most people won’t qualify for. Or they might say they’ll wipe out your loans by disputing them. But they can’t get you into a forgiveness program you don’t qualify for or wipe out your loans.
Be wary of unsolicited offers. The DC Department of Insurance, Securities and Banking (DISB) cautions residents to be on guard against student loan scams. Scammers often use what look like legitimate social media and search advertising links, so be cautious when clicking on these advertisements. Do research before responding to any company’s advertisement. Do not click on or use any links provided in the suspicious messages you receive, even if they claim to be from the Department of Education.
Protect your personal information. Companies may ask borrowers for personal information such as your Social Security number. Giving a company your personal information may allow them access to your account. When signing into your account, the company can make decisions on your behalf. Debt relief companies may ask borrowers to sign power of attorney agreements. Do not reveal your personal information or sign a power of attorney agreement.
Don’t believe claims of immediate loan forgiveness. There are government programs that can reduce federal student loans after a certain amount of time. Typically, companies selling student loan debt relief will be staffed by sales representatives. Do not let urgency or a pushy salesperson get to you.
Stay informed about your loans. It is important to make sure you are still receiving loan correspondence. Unscrupulous scammers may change your contact information on file with your lender to their own, so that their business, rather than you, receives all loan correspondence. Just because correspondence has an official-looking seal does not make the program legitimate.

Recognizing Scam Tactics

While not every scam will be easily recognizable, there are certain characteristics of scams that are easy to spot right away. In general, if you are asked to pay money upfront or share confidential information, be wary. Pay attention to the claims the company makes, too. The most popular student loan scams involve charging fees upfront. The FTC has made it illegal for any debt relief company to charge a fee upfront. So, if the company you’re looking at is promising to lower or renegotiate your debt AFTER you send them money, that’s an immediate red flag. Another key identification of a scam can be the way the company is advertising. Although there is nothing wrong with an online advertisement, be on the lookout and remember where you see these ads. While every company that advertises isn’t trying to scam you, make sure to do your research before working with them. Lastly, do not give away sensitive or personal information to any debt relief company. When you applied for college, there were federal aid or scholarship programs that may have required this information, but debt assistance organizations do not need them.

Real-Life Examples of Scams

The DISB cautions residents to be on guard against student loan scams. For example, you might receive a call like this: “Hello, this is (fake name) on behalf of the student loan debt department. We tried to contact you at your home but have not heard back. Your student loans have been marked as eligible for forgiveness under the new 2024 guidelines. Your case number is #12345, and your file will remain open in our system for only one more day. Please give our dedicated eligibility line a call at (fake number)." The “Student Loan Department” is not real. Never click on the link provided.

Where To Get Help

When it comes to your finances, there are plenty of organizations willing to help you navigate even the trickiest of situations. If you are unsure if a student loan assistance offer is legitimate, check for the following red flags. Make sure to ask questions. What are the true benefits? Why can’t your student loan servicers provide them? Be vigilant about not giving out your student loan information. Keep track of all communications. And know all your options. Immediately notify your federal student loan servicer. The servicer can provide you next steps and put a flag on your account. (If you need help locating your federal student loan servicer, log into your account at studentaid.gov). Also contact your bank to prevent any (further) payments to the scammer.

What To Do if You Paid a Scammer

There are several ways to report a student loan debt scam. Borrowers can report a scam to the Federal Trade Commission here. If you believe you have been the victim of a student loan scam or other financial fraud, contact the DISB Enforcement and Consumer Protection Division at 202.727.8000.

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