With student loan defaults on the rise, regulatory agencies are increasingly concerned about borrowers being preyed upon by student debt relief scammers. These scammers, which promise students they can cut their student loan payments by 50 percent or more, take advantage of students’ lack of knowledge about repayment options and a lack of intervention by student loan servicers that are paid by the federal government.
The Consumer Financial Protection Bureau’s student loan ombudsman, Seth Frotman, said the student loan debt scammers are strikingly similar to the mortgage relief scammers of the recession.
“What really concerns us is that the issues and practices we see are eerily similar to what happened in the wake of the mortgage meltdown, where we saw a number of scammers doing comparatively what they’re doing now in the student loan context,” Frotman said. “What we’ve seen is that many of the same practices, and many of the same entities, have sort of migrated over and have now really set their targets in the student loan space.”
How student loan servicers have allowed scammers to flourish
Student loan debt has risen to $1.2 trillion and student loan defaults continue to tick up. The rise in student loan defaults has been mostly driven by graduates of for-profit colleges, who are unable to pay their student loans because their degrees did not provide the same career opportunities as traditional colleges. The student population of for-profit college graduates also tend to be low-income before attending college, first-generation college students, and have a larger share of black and Hispanic students than traditional colleges.
Considering the fact that for-profit college students begin with little savings or family assistance, have a lack of family guidance and knowledge on attending college and signing up for student loans and, if they’re black or Hispanic, face a huge wealth gap, for-profit college students are often find themselves a desperate financial situation after graduation.
Scammers are taking advantage of that. Numerous websites make students promises they are unable to keep, such as telling students they can cut their student loan debt down to a certain percentage if they just pay anywhere from $500 to $2,500 for their services. One of these scammers, College Education Services, charged between $195 and $2,500, which they usually asked for upfront, according to the CFPB website’s alert on student debt relief scams. Although some of these scams ask for money upfront, not all of them do. Struggling borrowers are either contacted by scammers who are able to purchase their student loan debt information from data collection agencies or the borrowers find them through a simple Google search.
The Consumer Financial Protection Bureau has begun cracking down on these scams, as well as attorneys general, including California Attorney General Kamala Harris, Illinois Attorney General Lisa Madigan, Florida Attorney General Pam Bondi, and Minnesota Attorney General Lori Swanson. The Federal Trade Commission has said it noticed an increase of these scams after the U.S. Department of Education began expanding debt repayment options and debt forgiveness plans in June of last year.
The CFPB has asked Google to take action and let users find the U.S. Department of Education’s website for understanding debt relief options, instead of top links that take you to debt relief scam websites. Google worked with the government in 2011 after scammers went after distressed homeowners during the mortgage crisis in 2009, 2009, and 2010. So far, however, Google has not stated it would take any specific action to acknowledge the problem of student debt relief scammers.
Frotman said much of the blame lies with student loan servicers, such as American Education Services, Navient and Great Lakes, which are supposed to ensure that borrowers are aware of their debt repayment options.
“The Bureau is taking a hard look at shoddy student loan servicing practices that fail to help borrowers get into plans that can set them up for success and protect them from default. That has been lacking and what we have seen instead are scammers stepping into that gap. Unfortunately, these scams prey on the most vulnerable borrowers,” Frotman said.
How Google and data collection works for debt relief scams
Sam Adler-Bell, a policy associate for The Century Foundation, who focuses on research surveillance, privacy, and economic justice, experienced how borrowers are targeted firsthand when he was called by a student debt relief scammer a few weeks ago. He wrote about his interactions with one company, Student Debt Relief, and how it operates in a regulatory grey area. Mary, a representative of the company whom he spoke to on the phone, explained why he needed the service, even though he could easily do it for free:
But if you do it wrong, you’re married to it. You have to know the codes to pay off all your loans. You have to know how to do the promissory note. You have to know what you’re putting yourself into. Can you do it? Absolutely. Do I advise it? Absolutely not. Just like you could change the transmission in your car. Should you do that? I would say you should probably take it to a transmission specialist, but can you do it? Yes, you can.
Adler-Bell said that although he thinks Mary overstated the difficulty of applying for repayment options and other forms of debt relief, the current system is unnecessarily complicated and confusing for borrowers. According to the U.S. Treasury’s 2012 analysis, 70 percent of borrowers who are in default qualified for income-based repayment plans, suggesting borrowers may not have been aware of the option. The Government Accountability Office released a report last month saying that the department of education could do more to make students aware of their repayment options.
“When they’re already really freaked out because they’re in default and they’re otherwise distressed … Given those circumstances, the first thing that’s going to come up when they Google, both the ads and the actual non-ad results, are for-profit companies and not the department of education’s own walk-through of how to consolidate your loans. It’s totally understandable how people are falling for these scams,” Adler-Bell said.
Student debt relief scams will also use deceptive practices, such as logos that mimic government seals and URLs that end with “.us” that lead borrowers to believe they’re on a government website, such as Student Loan Processing.US, which the CFPB is currently suing. The CFPB also obtained a preliminary injunction against World Law Group last week for its debt-relief scheme.The company took $67 million in illegal fees from 21,000 people, according to the complaint filed in U.S. federal district court.
“The company that I profiled, Student Debt Relief, is an interesting example because they aren’t doing the really vicious illegal stuff as far as I can tell. They don’t take upfront fees, which is the big thing that is blatantly illegal. And they do disclose they’re not a government-affiliated company. They don’t do it very loudly,” Adler-Bell said. “But they are able to take advantage of this regulatory grey area. In a world in which the department of education was servicing borrowers adequately, there would no reason for a company like that to exist.”
Another element of the student debt relief scams is “lead generation,” or finding consumers who will be attracted to your product or service. Some scammers use their sites to gather more information on borrowers so they can sell that data to other entities, which continue to target the borrower. One way they do that is through asking for information from borrowers before they can go to the next step in the debt relief process.
“The FTC is also cracking down on these, but they have these fields on their website where you put in information to receive some kind of a quote, but all that information can be sold so that’s somewhat of a new tactic, and it creates a horrible cycle of exploitation,” Adler-Bell said. “Because you’re in distress, you go online and you put in your information and then your information gets sold, traded, and disseminated to all these other data brokers, advertisers, and predatory companies, so you’re getting inundated with more and more ads.”
How for-profit college students may be drawn into scams
Now that the department of education is developing a process for the borrower defense to repayment, which allows students to apply for debt forgiveness if they were defrauded by their college, student debt relief scams could get worse. With increased media attention on the issue and borrowers of student loans for for-profit colleges looking for ways to alleviate their debt burden, scammers may take advantage, said a member of the Debt Collective, Luke Herrine.
The Debt Collective, which is organizing with Corinthian College graduates and other for-profit college graduates, is pushing for automatic, blanket debt relief for students who have attended colleges that have been investigated for issues such as misleading job placement claims, schemes to raise tuition in order to push its own private loans, and misrepresenting students’ financial aid options. However, it’s unclear whether or not the department will allow students to receive blanket relief, and Herrine said he is concerned that individual applications where students have to make a case for why they were defrauded will only encourage student debt relief scams.
“If you require applications, then debtors have to find their way to the right site to fill out the right application, likely wading their way through many sites falsely representing themselves as providing relief,” Herrine said.
Herrine said the presence of scammers has also made borrowers suspicious of any genuine communication offering them debt relief.
“Not only is that a problem in itself, the presence of scammers will make students less likely to believe that they have a real opportunity for debt relief when a genuine [department of education] letter comes in the mail,” he said. “This is something we’ve had experience with directly. People who are having problems with their debt are constantly contacted by scammers and are hardened to anybody claiming to offer them a true life raft.”