Student Loan Consolidation Cottage Industry Grows With Targeted Ads

Student loan consolidation companies are kicking up their efforts to target struggling borrowers. 

From Facebook ads to prime-time commercials and radio spots, promises of student loan forgiveness, lower interest rates and lower monthly payments have been plastered before people’s eyes for months. With more than $1 trillion in outstanding student loan debt in the U.S., companies offering debt relief also appear to be taking advantage by targeting borrowers directly through the mail – and with surprisingly accurate knowledge about how much they owe.

An example of a sponsored Facebook advertisement promoting a student debt scam.Screenshot/Facebook

“We don’t know exactly how they’re getting some of that really specific borrower information,” says Deanne Loonin, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project.

The Department of Education began more proactively reaching out to borrowers in recent months, after debt relief companies began advertising services such as an “Obama Forgiveness Program” and claiming Congress passed a new bill to forgive student loan debt for qualified people. The congressional claim is blatantly false, and while a federal loan forgiveness program does exist, it was established before President Barack Obama took office and not all borrowers are eligible.

The department’s Federal Student Aid office launched a social media outreach campaign to inform borrowers that certain services charged for by debt relief companies – such as applying for loan consolidation or enrolling in different types of repayment plans – can be done for free through the government. The department’s student loan ombudsman, Joyce DeMoss, also published a blog post urging borrowers to keep certain information, such as Personal Identification Numbers, to themselves. “If you give your PIN away, you give others the power to perform actions on your student loan on your behalf,” DeMoss wrote.

“We’ve seen similar things where companies would charge you to fill out the FAFSA, and the department is just now starting to crack down on people illegally charging people for that,” says Chris Hicks, the Debt-Free Future campaign organizer for Jobs With Justice, a workers’ rights nonprofit. “It’s definitely gotten worse over the last few months, where it went from just the commercials to now they’re proactively reaching out to these people.”

A spokeswoman for the Education Department tells U.S. News that the student loan ombudsman receives complaints about these types of companies. Some borrowers are simply asking about a company’s legitimacy, while others have signed a contract or paid a fee. 

“Over the years, consistent with our informal problem resolution role, it’s our standard practice to determine whether the nature of the issue is something that falls within the scope of Ed’s authority or elsewhere,” the spokeswoman says. Depending on the situation, department officials may advise a borrower to consider loan consolidation or income-driven repayment plans, or refer them to the Federal Trade Commission or Consumer Financial Protection Bureau to make formal complaints about deceptive practices.

“We also let customers know that securing legal assistance may be an option they have to take to secure redress if other avenues prove unsatisfactory,” the spokeswoman says.

An example of a misleading letter sent to student loan borrowers about federal loan assistance programs.

Click for a larger image. 

An example of a misleading letter sent to student loan borrowers.

The letters mailed out to student loan borrowers – three of which were obtained by U.S. News – present information about federal loan assistance programs in a misleading way, Loonin says. 

The letters tell borrowers that due to the amount of their outstanding student loan debt they “are now eligible to receive benefits from a new law that has passed regarding federal student loans including TOTAL FORGIVENESS in some circumstances.” At first glance, one could conclude borrowers are being offered refinancing or consolidation services. But buried disclosures – one at the bottom of the letter and another in fine print, upside-down on the back – say the services are fee-based and not endorsed by or associated with the government, and that the company is filing paperwork on behalf of borrowers applying for or enrolling in certain loan programs.

“It’s all very scammy, but they try to make it look as official as possible,” Hicks says. “They put in all these false deadlines to make you nervous. And if you’re just a regular person working and you get this in the mail, it seems legitimate enough that you might call.”

The letters continue to say federal student loan programs may change, and urge borrowers to call within 30 days. They also warn borrowers that without “department approval for further program extensions,” student loan interest rates will likely increase next year – failing to mention that any increases will only apply to new loans. 

“Where do you start with the inaccurate information?” Loonin says. “First, there’s no new program for forgiveness. There are programs out there, but none of them are brand new. None have a 30-day deadline. That’s all wrong.”

Loonin adds that research conducted by her organization also has shown debt relief companies have tried to steer borrowers away from dealing with their loan servicers – the companies that handle federal loan repayments – and create a sense of distrust with the agencies.

It’s not the first time debt relief companies have been put in the hot seat for their marketing tactics. In 2013, a report from the National Consumer Law Center identified numerous problems with such companies’ marketing and sales practices: They mischaracterized federal programs as their own, charged high fees for free services and provided inaccurate information about consolidation and other topics. The report also identified several potential violations of consumer protection laws. 

In January, New York Gov. Andrew Cuomo announced that his Student Protection Unit had issued subpoenas to 13 student debt relief companies over concerns about misleading advertising and other consumer protection problems.

A graphic reading:

Diana Soliwon for USN&WR

In July, Illinois Attorney General Lisa Madigan filed lawsuits against two debt relief companies – First American Tax Defense LLC and Broadsword Student Advantage LLC – accusing them of deceptive marketing practices and illegally charging borrowers as much as $1,200 for “bogus services” to reduce or eliminate their debt.

But at least one company that’s mailed letters to borrowers says it’s offering a legitimate service.

Tim Myers – a sales manager for the Student Loan Education Center, which has mailed the type of letter in question to student borrowers – describes his company as “the H&R Block of federal student loans.” 

Myers says that for $300, the company will prepare and file paperwork on behalf of borrowers who seek its services. Much like taxpayers go to accountants or tax preparation companies to save time and money, student loan borrowers have the same option through companies like his, Myers says. 

Many have highlighted the fact that federal student loan forgiveness and repayment plans are underused, and that borrowers often have a difficult time navigating the application processes for enrolling. Obama has said increasing awareness about student loan repayment options would be a priority of his larger college affordability agenda, and the Education Department teamed with the Treasury Department and tax software company Intuit during tax season to raise awareness about income-driven repayment options. 

The president in June also announced he would expand the federal Pay As You Earn program to all federal student loan borrowers.

“We’ve actually done quite a lot to educate borrowers about loan consolidation and loan repayment options,” the department spokeswoman says.

More than 500,000 borrowers have taken advantage of a loan consolidation option the department implemented last year, and more than 2.5 million Direct Loan borrowers were enrolled in income-driven repayment plans as of July, the spokeswoman says. An August 2013 analysis from the Consumer Financial Protection Bureau showed 1.58 million borrowers were enrolled in an income-driven repayment plan at the time.

But student advocates, including Hicks, have said the government and its contracted student loan servicers still aren’t doing enough to promote repayment options, and that borrowers may turn to fee-based debt relief companies out of confusion. The Debt-Free Future campaign and other organizations – such as the American Federation of Teachers, the National Education Association and the United States Student Association – have begun developing a community-based training program through which individuals can present free information about student loan repayment and forgiveness in workplaces, places of worship or college campuses.

“The No. 1 thing we’ve come up against in the work we’ve done is people are just really confused and no one is there to help them,” Hicks says.

Myers says processors at the Student Loan Education Center all receive certification through the International Association of Professional Debt Arbitrators, and borrowers are initially informed of free options through the government when they call and speak to the company’s processors.

“We offer to educate students out there on what’s available,” Myers says. “We help them prepare the paperwork, and submit it on their behalf.”

But Mike Cagney – co-founder and chief executive officer of SoFi, an online lending pool that also refinances and consolidates student loans – says charging for the services is still wrong.

“From an ethical standpoint, what these businesses are doing is not right,” Cagney says. “The company is promising to help you, but it’s the government’s program that’s helping you. I don’t think that’s clear. If people were better educated about that, then these businesses wouldn’t exist.”

The direct mail throws a wrinkle in the mix. Several consumer advocates and legal experts could not pin down exactly how such exact student loan data was obtained.

Nicole Hochsprung – a 2010 graduate of the College of St. Benedict in St. Joseph, Minnesota, who now works for the American Federation of Teachers – received a letter and says it was “disheartening” to see how accurate her outstanding loan balance was. Hochsprung says she was also suspicious that the letter prominently displayed the Department of Education’s name, but didn’t include an official seal. 

“So immediately my antenna went up of, ‘OK, this is not from any of my servicers, so who is this really from?'” Hochsprung says, adding she suspected the loan information must have come from a credit reporting agency.

Depending on how the data is obtained, it could be in violation of the Fair Credit Reporting Act, says Joel Reidenberg, a law professor at Fordham University and an expert on data privacy. 

It’s possible that a business could buy the information from credit reporting agencies such as Experian, TransUnion or Equifax, or through a middleman lead generation company. The Fair Credit Reporting Act prohibits consumer reporting agencies like credit bureaus from providing individuals’ information to those without a valid need, such as a bank offering a line of credit or a company using it for employment purposes. Both the seller of the data and the recipient have legal obligations under the law, Reidenberg says, and because the letters are not offering a line of credit, they could violate those obligations.

A compliance supervisor with the Student Loan Education Center tells U.S. News the company compiles its information from multiple lead-generating marketing companies to come up with a “guesstimate” of an individual’s loan balance. 

But a potentially gray area comes up with document preparation and the possible role of marketing companies in distributing loan balance data.

“It depends on the nature of the pitch you receive, and it also depends on how the marketing company is getting the data,” Reidenberg says. “If they’re laundering it for a credit reporting agency, then even if they’re selling it for marketing purposes, not underwriting, it won’t matter because they’re a data launderer.”

The expansion of the cottage industry around student loan debt relief isn’t just a problem for borrowers, though. Hicks says it also poses an obstacle for loan servicers, who are allocated loans from the Education Department based in part on customer satisfaction. If borrowers can’t distinguish debt relief companies from their loan servicers, the Education Department or a debt collector, they may think the entities are one agency working together, he says.

“For people that are seriously in financial distress, to then have to worry about these predatory actors that are trying to squeeze every penny out of you that they can, it’s going to create larger distrust in the government, and it’s going to create larger distrust in the servicers,” Hicks says. “People are starting to distrust higher education, and that’s a problem.”

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