How to Spot and Steer Clear of Student Loan Consolidation Scams

Last Updated on December 30, 2020

With around 44 million Americans owing $1.3 trillion in student loan debt, it’s not surprising that many are struggling with repaying their student loans. In fact, around 8 million borrowers went into student loan default in 2016 alone. With so many people feeling overwhelmed by their student loans and desperate to find ways to reduce their debt, it’s not surprising that scammers are taking advantage of the situation.

You’ve likely heard from student loan scammers – either through email, via an online advertisement, or by phone. They often advertise as Obama Student Loan Consolidation or Forgiveness Programs and offer to do things like get rid of your federal student loans, consolidate them for you, and reduce or eliminate your payments.

The government has started to crack down on the scammers – who often take lump sums or monthly fees from desperate borrowers. Many scammers promise things that they can’t deliver like a guaranteed 50% to 70% loan reduction with consolidation. Then they never actually do anything or they take your credit card information and your Social Security number and defraud you even more or steal your identity.

3 Things to Watch Out For

It’s important to know that you don’t need a company to help you consolidate your federal student loans via the Direct Consolidation program – it’s something you can easily do for free. While there are legitimate companies who help you evaluate whether or not student loan consolidation is right for you, and help you do the paperwork – the process is not that complicated and you’re likely better off doing it yourself.

If you do want to have a company help you with the process, there are a few red flags that will help you spot scammers. For example, if a company says that you should stop making payments on your loans and that you should send your student loan payment to them instead of to your student loan servicer, they are likely a scammer.

Companies who contact you via a robocall or who claim to be working with the Department of Education or to be offering services as part of the Obama Student Loan Program are also likely to be scammers. Legitimate companies cannot claim to be working with the Department of Education and do not use robocalls to contact you.

Finally, companies that ask for monthly fees or payment upfront are likely not legitimate. Legitimate companies that help you consolidate your federal student loans will not accept payment until they perform a service – though some will take the money and put it in a holding account until they’re able to help you consolidate your student loans successfully.

What is the Direct Consolidation Loan Program?

The Direct Consolidation program doesn’t wipe out your federal loans or reduce the amount you owe – as some scammers claim. Instead, it combines your loans into one loan which might make it easier to repay depending on your particular circumstances. It doesn’t lower your interest rate, but rather takes all of your federal student loans and puts them together into one loan with a new interest rate that is the weighted average of your previous loans with up to an additional 0.125% tacked on.

Federal Direct Consolidation makes sense for many borrowers as it allows them the ease of repaying just one loan, can allow them to extend the term length on their loans in order to reduce their monthly payments, and is necessary for borrowers to qualify for the Public Service Loan Forgiveness program.

Another benefit of the student loan consolidation is that it allows you to more easily rehabilitate any loans that you have that are in default.

Private Student Loan Consolidation

Consolidating student loans is essentially paying off multiple student loans with one loan. The problem with the Direct Consolidation program is it only allows you to consolidate your federal loans and not your private student loans. Private student loan refinancing allows you to consolidate both federal and private student loans – although if you consolidate federal student loans you lose some of the alternative repayment options and benefits that federal loans offer.

There are many companies currently offering private student loan consolidation and refinance. Many of these companies are start-ups, but there are some like Education Loan Finance, which have over three decades of experience in the student loan industry. Education Loan Finance is affiliated with SouthEast Bank and offers student loan consolidation options for borrowers who would like to lower their monthly payments, pay a lower interest rate, and get more flexible terms on their federal and private loans.

All borrowers who are struggling should look into consolidating student loans as it can save borrowers a significant amount of money as they can reduce their interest rate or greatly reduce their monthly payments by extending the term length of their loans.

By Andy Rombach, LendEDU