Illinois is suing a pair of companies that promised to rescue struggling student loan borrowers in exchange for a few hundred dollars in up-front charges. The lawsuits charge these companies were running a scam that targeted indebted students and failed to deliver the promised assistance while further damaging borrowers’ financial outlook.
Ads for debt relief services inundated Illinois in the past couple of years, according to the New York Times, as First American Tax Defense and Broadsword Student Advantage preyed upon thousands of student loan debtors who are struggling to find adequate work to repay their education debt. Clients were unaware that the same debt consolidation services are often available at no cost through the Department of Education.
In some cases, the companies pretended to be affiliated with the government in order to lure borrowers into handing over hundreds of dollars in fees on the assurance that the companies would win them easier repayment terms, the lawsuits allege. First American advertised something called the Obama Forgiveness Program, saying that Congress had extended a new lifeline to struggling borrowers and offering to help customers take advantage of it. No such program exists.
One man who was struggling to make $60 monthly payments on his loans paid First American $175 to enroll him in the “Obama Forgiveness Program,” according to the Times, before deciding to call the Department of Education and confirm what the company had told him was a partnership between the firm and the government.
Swindles like those alleged in the Illinois lawsuits are a predictable response to the recent spike in student debt and student loan defaults. The total student debt load now stands at well over a trillion dollars, and the default rate has hit a record high. Default rates understate the severity of repayment problems, because it takes nine months of non-payment to trigger a default. Researchers say that 30 percent of borrowers who are far enough out of school that they should be repaying their loans are delinquent, meaning they are three months behind on payments but have not yet defaulted on their debt.
With one in eight borrowers in default and another three in 10 at the precipice of default, there are millions of desperate people ready to believe the kinds of improbable promises that companies like First American and Broadsword make in their ads. Illinois is the first state to file suit over fraudulent debt relief companies that target these student loan borrowers, but it is unlikely to be the last. The Consumer Financial Protection Bureau (CFPB) has been warning of debt relief scams targeting education borrowers around the country for several months.
Unlike other forms of consumer debt, student loans cannot be discharged in bankruptcy, so default is not a solution for the millions of graduates who are finding it difficult to repay their loans. But that doesn’t mean that dishonest private-sector companies are their only recourse. The Department of Education has a variety of debt relief options for eligible borrowers, and the offerings are not limited to the sorts of consolidated payments and prolonged repayment schedules for which Broadsword and First American charged clients.
Borrowers may enroll in income-based repayment programs, such as Pay-As-You-Earn (PAYE), which allow graduates to pay ten percent of their income for a fixed period of time and then have the remainder of their debt cancelled. That category of repayment options has been around for years, but enrollment is still relatively low despite repeated efforts to publicize PAYE by President Obama and administration officials.