Federal Student Aid (FSA), an office of the Department of Education, released a series of quarterly reports reflecting federal student loan activity through December 31, 2015and provides a broad look at the state of affairs when it comes to federal loans.
According to the New Direct Loan Default report, 20% of all federal loan borrowers are in default on their federal student loans – that translates into $121 billion of loans in default.
But once you add in the number of borrowers who are in forbearance, deferment, or delinquency the numbers look even worse – 40% of all borrowers are not making any payments whatsoever.
More than 336,000 borrowers entered default last quarter, and more than one million borrowers entered default for all of 2015, according to the government. 24,500 of them are defaulting for at least the second time.
And those defaults are feeding the 22 private collection agencies on contract to go after borrowers.
During the quarter ending December 31, 2015, the Department recovered more than $2.2 billion in defaulted student loans through its private collection agencies. More than three-fourths of the recoveries were due to rehabilitations ($1.7 billion); nearly 10 percent due to consolidations; 8 percent due to wage garnishments; ($170 million) and almost 4 percent voluntary payments.
Separately, the US Department of Treasury reported that it had collected $.27 billion through the Treasury Offset Program (TOP) in 2015.
Though the government claims it is working to get the word out to borrowers about their income-dependent repayment options, the Consumer Financial Protection Bureau reports that complaints against student loan servicers in the 12 months through September 30, 2015, rose 23% to 6,400. Student loan servicers have been found to be illegally placing loans in default, and some Department of Education debt collectors were improperly threatening to garnish borrowers’ wages.
And that brings us to the student loan debt relief scams that prey on people who can’t get a straight answer about their options, and are looking for any possible answer to their problems.
Some of these companies try to convince borrowers of affiliations with the Department of Education. Others just make promises that you can get forgiveness of your federal student loans right now.
These companies put you into federal student loan consolidation and income-based repayment – two programs you can access for free through the Department of Education or your student loan servicer. If you’re in default, they’ll consolidate your loans out of default rather than go through the rehabilitation process – something that’s often a better financial deal that gives you a better credit report as a result.And the problem doesn’t stop with federal student loan scams. Private student loan scams are growing day by day. In fact, I’ve been getting calls from people who have been talking with a so-called national law firm that promises to settle their private student loans for 40 cents on the dollar and get them a new loan to cover the settlement amount. In return, the law firm gets a whopping $20,000 legal fee.
And the problem doesn’t stop with federal student loan scams. Private student loan scams are growing day by day. In fact, I’ve been getting calls from people who have been talking with a so-called national law firm that promises to settle their private student loans for 40 cents on the dollar and get them a new loan to cover the settlement amount. In return, the law firm gets a whopping $20,000 legal fee.Now think about it – if you believe for one minute that anyone – anyone at all – can guarantee the outcome of a negotiated settlement then you’re out of your mind. There is no way to predict and guarantee any particular outcome – ever.
But there’s no way to guarantee any particular settlement outcome. And the new lender is likely going to offer terrible payment terms because your credit is ruined by going into default.
In addition, the law firm doesn’t tell you that they may have to pay taxes on the amount they save on this so-called guaranteed settlement.
Student Loan Scams Under the Government’s Microscope
The CFPB is doing what it can to help stem the flow of student loan scams.
On March 15, 2016 the CFPB convinced a federal judge to order student loan scammer Student Loan Processing.us to shut down within 45 days and reimburse student loan borrowers who used the company’s services. This order was the result of a lawsuit filed last year against the company, claiming that it “charged consumers illegal upfront enrollment fees before providing any services, deceived customers about the costs of their services and falsely represented an affiliation with the Department of Education.”
The company charged customers an initial enrollment fee of 1 percent of their federal student loan balance, plus a monthly maintenance fee of at least $39 per month for the entire repayment term. In exchange, the firm promised to advise and assist customers applying to student loan repayment programs.
The judgment order also asks the company to pay $8.2 million to affected victims, but much of that payment is suspended because Student Loan Processing can’t pay it. Instead, the company will pay the CFPB $326,000 toward the $8.2 million that the bureau will distribute to consumers.
How to Avoid Getting Sucked Into a Student Loan Scam
So how do you avoid getting scammed? Unfortunately, it’s not always so easy to tell the good guys from the bad guys. Here are my tips.
- If a web search of the company’s name turns up only promotional websites and news pieces from the company – it’s likely a scam.
- If the company’s website doesn’t specifically talk about the people in charge – it’s likely a scam.
- If you read the company’s website and think – gee, if this is true then everyone would be out of debt … The problem still exists – then it’s likely a scam.
- If the person on the other end of the line is talking about your federal student loans and doesn’t tell you that you can fill out the forms on your own – for free – then it’s likely a scam.
- If at the end of the call, you have only a vague notion of why this particular solution is the right one for you – then it’s likely a scam.
- If the company is charging you hundreds of dollars to process forms – then it’s likely a scam.
- If there’s an ongoing monthly or annual fee that gives you nothing more than monitoring- then it’s likely a scam.
- If the company is talking about your private student loans and makes you a guarantee of any sort- then it’s likely a scam.
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