As the level of student loan debt continues to grow and millions are struggling to repay their loans, a "debt relief industry" has sprung up to address the concerns of distressed borrowers and help them navigate an array of complex borrower-assistance programs. But many companies are taking advantage of borrowers' confusion by charging them high fees for services they can get for free from the federal government, according to a report from the National Consumer Law Center.
As a part of its investigation, the NCLC made secret shopper calls to 10 such debt relief companies, reviewed company contracts and consumer complaints, and discussed the issue with federal regulators and other experts. The report found that the companies tend to mischaracterize government programs as their own, charge high fees for free programs and give inaccurate and misleading information about the student loan industry.
When borrowers default on their student loans, meaning they are at least 90 days late on their payments, they may face consequences like wage garnishment, damage to their credit scores and evenlegal action. According to a report from the New York Federal Reserve, 17 percent, or 6.7 million borrowers, are in default. Because many of the defaulted borrowers are unaware of government assistance programs available to those with federal student loans, or unable to navigate the enrollment process, they sometimes turn to outside companies for help.
But the companies that the NCLC investigated charged borrowers initial fees of up to $1,600 to sign them up for "one-size-fits-all" consolidation and repayment plans to help them get out of default, according to the report. Some also charge monthly fees of $20 to $50 for ongoing services.
"It is unlikely that these companies are providing quality services in return for the money they are charging," the report said. "Such practices severely compound the pain of vulnerable consumers seeking to find resolutions to difficult student debt problems."
Chris Lindstrom, director of the U.S. Public Interest Research Group's higher education program, says she hopes the Department of Education "takes the report to heart." If the department did a better job of marketing the services that are already available, she said, borrowers wouldn't feel the need "to pay somebody to help them access the programs."
"This is another area where loan borrowers end up incurring even more costs," Lindstrom says. "To the extent that they can, the department needs to get in there and do more aggressive outreach to help lower the overall costs folks are incurring."
But Daren Briscoe, the department's press secretary, said that while it does not oversee the debt relief companies, the department has provided several counseling tools to assist borrowers with managing their debt and avoiding scams, such as the Financial Awareness Counseling Tool.
"While the Department has no authority over those private entities," it has launched a student financial aid website with many "no-cost tools and resources for borrowers, including information on several repayment plans available to borrowers," he said.
The report also concluded that some of the companies' actions may violate numerous consumer protection laws, including the Federal Trade Commission Telemarketing Sales Rule and the federal Credit Repair Organizations Act.
Some of the potential violations stem from companies not including a three-day cancellation right in contracts, and requiring borrowers make payments before the company will initiate its services, the report said.
One company that offers debt relief services to student loan borrowers is Student Consulting Group Inc., formerly known as the University of One.
Last July, the Better Business Bureau of West Florida revoked the company's accreditation for failing to "eliminate the underlying cause of complaints on file."
The bureau said it received numerous complaints from customers alleging that the business did not perform student loan consolidation services after having been paid. The bureau then asked for information about why the company believed customers were upset, as well as a course of action to resolve the complaints, but the consulting group said it did not believe it had a pattern of complaints. Instead, it stated that the increase in complaints was due to an increase in the number of customers it serves.
The 37 complaints detailed on the bureau's website, which have since been resolved with involvement from the bureau, allege "dishonest sales practices," "unauthorized bank debts" and "improper or inferior service."
"The industry needs some watchdogging, and should be playing by some basic rules that protect these borrowers as consumers," Lindstrom said.