The U.S. Department of Education has issued a scam alert about some companies that promise to help lower monthly payments for students who are buried in huge amounts of college debt.
Nearly 41 million people have outstanding federal student loans, according to Federal Student Aid, part of the U.S. Department of Education. Meanwhile, only about 4 million student loan borrowers are participating in income-based repayment (IBR) plans. Although that number has doubled in just the last year, the problem is that many borrowers still don’t realize these plans are available and that they can get help for free.
Read more: Clark’s Student Loan Guide
And the lack of communication to borrowers about their repayment options has provided scammers with an easy way to take people’s money.
How to spot the scams
For a recent college graduate who’s buried in debt with unreasonable payments looming and not enough income to cover it, an offer from a company that ‘guarantees’ it can help you — for a small fee — can sound enticing. But don’t do it!
Loan consolidation can be a great way for grads to get a more reasonable payment plan or even get their loans forgiven. The problem is there are tons of scammers out there taking advantage of people who are struggling to make payments and looking for a way out. One of the most common scams is when a company offers to consolidate your loans for a fee. Whatever the fee is called, if there is any charge, don’t do it.
The reason they’re labeled as ‘scams‘ is because these companies typically don’t make it clear to consumers that the Department of Education offers this same service FOR FREE. This is a process you can do entirely on your own.
If you have a federal student loan, there are no fees for debt consolidation.
If you have private student loans, unfortunately, there are no similar programs to help with repayment of private student loans, which is partly why Clark advises against them. But, there are ways to refinance them. Just a note, refinancing is different from consolidation. With refinancing, you’re taking out a separate loan with a lender that pays off your existing loan. Here’s Clark’s advice for refinancing private student loans. You can also check out Credible, a comparison tool that shows you offers from lenders in the industry.
Why consolidate student loans?
Consolidating federal student loans can not only help borrowers keep track of payments (if they have more than one loan), but it also provides a way to qualify for different types of repayment and forgiveness plans. For example, consolidating some types of loans will qualify you for income-based repayment programs. These programs limit monthly student loan payments based on a percentage of income — to help borrowers reduce their payments and pay on time. There are also programs that include loan forgiveness, which means the remaining balance on a borrower’s loan is forgiven after a certain number of years. Some types of loans don’t require consolidation for you to participate in an IBR or forgiveness program.
How to do it for free
If you aren’t sure what type of loans you have, you can find information on your current loans on the National Student Loan Data System. Once you choose which loans to consolidate, you can then apply for a consolidated loan (Direct Consolidation Loan) — for free — via studentloans.gov. You’ll then be able to see which repayment plans you qualify for and choose a provider for your new loan.
In order to qualify for income-based repayment, you have to go through a separate application process in order to verify certain information, including your annual income. You can visit IBRInfo.org for more information.
If you need help completing the process, you can contact the Loan Consolidation Information Call Center at (800) 557-7392. The service is free and can help you figure out what documents you’ll need, how to choose a repayment plan, and which of your loans are eligible for consolidation.
It’s also important for borrowers to know that consolidating student loans is not required to qualify for income-based repayment. Contact your servicer to get more details on your particular situation. If you don’t know who your servicer is, Federal Student Aid has a way for you to find out.
Available programs, who qualifies & what you get
Here are some details on the different programs available to borrowers:
Here are more tips on paying off student loan debt and what to know before taking out funds to pay for education.