Avoid Common Student Loan Scams

By AMY FONTINELLE | Investopedia Apr 3, 2020

Actual student loan companies like Navient, which have been embroiled in lawsuits and allegations from states like Pennsylvania, as well as the Consumer Financial Protection Bureau, The worst student loan companies may appear to be scammers, but there are actual student loan forgiveness scams that borrowers may encounter.

When loan holders seek help with some aspect of their loans, like reducing their balance or monthly payment, for example—or repaying their loans faster, stopping payments temporarily, or getting loans out of delinquent status, student loan scammers may make it difficult for them to get actual help.

Here are the worst and most common student loan scams you might encounter and how to identify them so you won’t get your money stolen or your credit trashed.

KEY TAKEAWAYS

  • You don’t have to pay anyone to make changes to your student loans.
  • The Federal Department of Education provides and processes applications for income-driven repayment, consolidation, deferment, and forbearance for free. It also provides free guidance on how to complete the paperwork.
  • Don’t believe companies that say they can reduce or eliminate your student loan debt, and definitely don’t give them any money.
  • Ignore unsolicited requests for personal information that appear to be coming from student loan providers.

Scam #1: Filling Out Forms for a Fee

Do you want to lower your monthly student loan payment to an amount you can afford based on your income? You can pay someone to complete an income-based repayment plan request for you, but you can also fill out the application yourself. Income-based repayment application forms are available for free at the official federal student aid website, StudentLoans.gov. The same is true of deferment and forbearance applications.

Paying For the Help You Need vs. Getting Scammed

If you choose to pay someone for help in completing these forms and you know you have the option to complete them for free, that’s fine. But some companies have taken advantage of borrowers who don’t understand their options. They’ve charged them for help without explaining the free alternative.

How would you feel if a tax prep company told you the only way to get your tax refund was to pay them to complete and file your tax return? The truth, as most people probably know, is that you can do your taxes yourself for free. You can even file your returns electronically for free if your income is below a certain level; if it’s not, you can file your return by mail for free.

Some people find the process confusing and time-consuming, so they hire a tax accountant, visit their local tax preparation store, or pay for tax software. They might find that the service pays for itself in the time and frustration it saves them, and that they might even owe less in taxes—more than offsetting the tax prep fee they choose to pay—by getting professional help.

Free Repayment Options and Loan Consolidation

Likewise, legitimate services exist to help borrowers evaluate their student loan repayment options and apply for the program that best suits their needs. It is possible to make costly mistakes when repaying your student loans.

But to avoid getting scammed, it’s important to know that paying to apply for deferment, forbearance, or a different repayment plan is optional. Neither the federal government nor the private companies that service (collect payments) on student loans charge borrowers money to request different loan terms.

The same is true of federal student loan consolidation. You can complete and submit the student loan consolidation application yourself for free. Private student loan consolidation does not exist, but you may be able to combine several private student loans into one and lower your interest rate, with a refinance.

Any loan fees associated with refinancing will not be charged until your loan is finalized and are usually deducted automatically from your loan proceeds. You don’t have to pay anything upfront.

Scam #2: Getting Loans Forgiven, Cancelled, Discharged, Reduced, or Eliminated for a Fee

What borrower wouldn’t love to have their debt erased? Unfortunately, the reality is that when you borrow money, you almost always have to repay it in full, with interest. Even if you die, your estate may have to repay your debt—or any taxes on forgiven debt—before any assets you left behind can be distributed to your heirs.

Between the way that borrowing laws and tax laws are written, it’s safe to assume that if a company promises to negotiate a student loan debt settlement on your behalf, it’s a scam. If they say they can help you get your student loans discharged in bankruptcy, don’t believe it. They also can’t get your debt eliminated by representing you in a lawsuit against your student loan company.

Scams in this area typically involve telling the borrower that if they pay a large sum to some company, the company will get their loan discharged. In some cases, they might tell the borrower to send their student loan payments directly to the company instead of to their student loan servicer.

Either way, the result is likely to be that the company takes the borrower’s money and the borrower falls behind on their loan. They end up owing even more because of the additional interest and late fees that accrue, and their credit scores may drop when the loan servicer reports the late payments to the credit bureaus.

Public Service Loan Forgiveness (Not a Scam)

Public Service Loan Forgiveness may apply to certain federal loans in limited circumstances. This program has been rife with problems since the first borrowers became eligible for forgiveness in October 2017. Teacher loan forgiveness and Perkins loan cancellation may also be available to borrowers with eligible employment or volunteer service.

Federal student loans can only be discharged in the following circumstances:

  • Total and permanent disability
  • Death
  • School closure
  • False certification
  • Unpaid refund

Again, if one of these situations applies to you or a family member, the forms are available for free at StudentLoans.gov.

Scam #3: Requesting Personal Details

The U.S. Department of Education will not contact you and ask for personal details such as your Social Security number, account number, date of birth, FSA ID number and password, address, or account balance. Nor will your student loan servicer or a government-contracted private collection agency. But scammers will.

They might try to fool you by asking you to “confirm” your information. That could sound like a legitimate request: They need to make sure that they’re actually talking to the borrower, right? If you find yourself in this situation, disengage. Don’t worry about being rude. End the interaction immediately. Your financial health could be at stake.

Think about it: If the entity requesting such information was reaching out to you, they would already have this information.

A scammer may tell you that you have to act quickly—before a federal program expires, for example, or enrollment is capped. Don’t believe it.

If a letter, email, or phone call you’ve received seems legitimate but you’re not sure, here’s how to check: Do not call the phone number listed on the letter or send information to the address it provides. Don’t reply to an email, call a phone number provided in an email, click on any links, or download any attachments. Tell a caller you’re not available right now and hang up.

Then, contact your student loan servicer directly using the information at the servicer’s official website. They’ll be able to look up your account and tell you whether the letter, email, or phone call you received was real or fake.

What could happen if you fall victim to this scam? Identity theft. Unauthorized changes to your student loan account. Damage to your credit. Way too many wasted hours cleaning up the mess.

The Bottom Line

To avoid student loan scams, stay away from companies that approach you or that show up in search engine ads. Even if you get a letter or phone call from someone who appears to know the details of your student loan, such as how much you owe, it could be a scam. Companies can purchase information about borrowers’ obligations and use that information in their marketing efforts.

Also, steer clear of any company that pressures you to act quickly. They’re trying to get your money before you have enough time to step back from the situation and think clearly about whether working with them is a good idea. Ignore their high-pressure tactics and firmly tell them, no thanks.

How to Pay Off Credit Card Debt

By MATTHEW D’ANGELO | Investopedia

Updated Jul 9, 2020

Using a credit card can help you build a strong financial foundation.
But credit card debt can rack up quickly.

That’s especially true in difficult times. Almost half of Americans currently carry credit card debt, and 23%1 have added to their debt during the COVID-19 pandemic and resulting economic crisis. If you have credit card debt and want to pay it off, this article can help.

KEY TAKEAWAYS

  • Credit cards can carry high-interest rates, making them one of the most expensive ways to borrow money.
  • If you make only the required minimum payment on your credit card each month, your balance will roll over into the next month and accrue more interest charges.
  • The most cost-effective way to manage a credit card is to pay your balance in full each month.

If you’re carrying a balance on more than one credit card, plan to pay the one with the highest interest rate off first

KEY TAKEAWAYS

  • Credit cards can carry high interest rates, making them one of the most expensive ways to borrow money.
  • If you make only the required minimum payment on your credit card each month, your balance will roll over into the next month and accrue more interest charges.
  • The most cost-effective way to manage a credit card is to pay your balance in full each month.

If you’re carrying a balance on more than one credit card, plan to pay the one with the highest interest rate off first.

Why Is Paying Off Credit Card Debt Important?

The balance you carry from month to month on your credit card can have a major impact on your credit score. In fact, your credit utilization ratio, which is how much you currently owe compared to your total credit limit, accounts for about a third of your score. Experts suggest that you should generally try to keep your credit utilization ratio below 30%. That means if your card’s credit line is $5,000, you don’t want to owe more than $1,500 at any given time.

A higher credit utilization ratio, especially if combined with a rocky payment history, will damage your credit score and make it difficult or impossible obtain loans or other credit. A poor credit score can also mean higher insurance rates and even impair your ability to rent an apartment or get a new job. your ability to That’s why it’s important to pay your credit card bill on time and try to pay down any big balances as quickly as possible.

Your credit score isn’t the only reason to maintain a low balance on your credit card, of course. The more debt you carry, the more you’ll also pay in interest charges—and credit cards charge some of the highest interest rates around, often well over 15%, sometimes more than 20%. Carrying a lot of debt means paying a hefty price for that borrowed money. What’s more, credit card interest, unlike the interest on a home mortgage, for example, isn’t tax-deductible. So you’ll also lose out at tax time.

How Credit Card Interest Adds Up

When you get a new credit card, the company that issues it, such as a bank, will assign you a certain credit limit. As you use your card throughout the month, your balance will grow and the amount of credit you have available as part of your credit line will shrink. At the end of the monthly billing cycle, you’ll be required to make a minimum payment specified by the card issuer, which is calculated as a percentage of your total balance.

Paying that minimum—and paying it on time—will keep you in good standing with the credit card company. But it will also mean rolling the remaining, unpaid balance on your card over into the next billing cycle. At that point, interest and possibly other fees will be added to the amount you owe.

If you continue to roll a balance over from month to month, you’ll not only accrue more interest on your debt, but interest on the interest on your debt. In that way, your balance can begin to snowball.

For that reason it’s always best to pay more than the minimum amount due each month and to chip away at your balance as aggressively as possible. If you’re able to, the ideal approach is to pay your balance in full each month and never owe any interest at all.

To reduce your credit card debt and interest charges, consider using cash for purchases whenever possible.

3 Simple Ways to Manage Your Credit Card Debt

If you’re having trouble managing your credit card debt, here are some things you can do to get back on track.

  • Pay down credit cards in interest rate order:

If you have balances on more than one credit card, pay at least the minimum due on each of them and then apply any additional money you can scrape up to the card that has the highest interest rate. Once that one’s paid off, move on to the second most expensive card, and so on.

  • Avoid new debt:

While you’re working to pay off your outstanding credit card debt, it’s smart not to take on any new debt and dig yourself into a deeper hole. Some bills may be unavoidable, but this would be a good time to put major purchases that you’d ordinarily pay for with a credit card, on hold.

  • Use cash:

Studies show that consumers spend less money when they use cash instead of credit cards. One MIT study, for example, found that students using credit cards to buy sporting event tickets were likely to spend up to 83%2 more than if they used cash. So if you want to work on paying down your credit card balances, put your cards away and, wherever possible, use cash instead. Paying with cash can also be a good reality check. While credit cards encourage a buy-now-worry-later approach, once you’ve used up the cash in your wallet, it’s gone.

The Bottom Line

It’s easy to fall into credit card debt, but it can be hard to dig back out of it. Plan to pay more than the minimum monthly payment on your card, and if you’re running a substantial balance, focus on paying it off as quickly as possible. The longer it takes to pay off a balance, the more money it will end up costing you.