Our June 2013 report “Searching for Relief” highlighted abuses in the for-profit student loan “debt relief” industry. We wrote since then to debunk the argument that these companies are just like tax preparers.
The CFPB echoed these warnings in this July 2013 advisory. More recently, New York’s Department of Financial Services issued subpoenas to 13 companies that offer debt relief and consolidation for student loans. In announcing the first official action of his Student Protection Unit, New York Governor Andrew M. Cuomo said, “The rising tide of student loan debt has made it more important than ever that we put in place strong consumer protections for New York’s students.” Governor Cuomo went on to say, “Any company trying to sell students a raw deal using misleading or deceptive practices should know that we’ll continue to work vigilantly to root out consumer abuse.”
We received an e-mail from a student loan borrower that further illuminates why these companies are so deceptive. The consumer said:
“I recently heard a commercial on the radio offering assistance for people that had past due student loans. When I called the number, I was told I qualified for a 10 year payment plan based upon my income and that after the 10 years any funds I still owed would be forgiven. The individual I was speaking to then indicated there would be a six month fee of $99 per month to set up this plan.”
What’s wrong with this picture? Let us count the ways:
1. Deception: The ten year forgiveness plan is not a unique product that the company offers, but rather a government program for certain borrowers. The companies don’t want to tell consumers that these are government programs because they are trying to sell their “special expertise.”
2. Inaccurate Information. The ten year program the company is talking about is most likely the public service loan forgiveness program. The company failed to explain that this program is not for everyone. It is only, as the name suggests, for borrowers working in public service jobs. They must also be working full-time to qualify. This consumer did not meet these qualifying conditions and therefore would not be eligible to get loan forgiveness after ten years.
3. A lot of money for a free program. Six hundred dollars is a lot of money to pay someone to do something that you can do for free. (Some companies charge even higher fees!) It’s theoretically possible that some informed consumers might want to pay these huge sums, but if the companies provided accurate disclosures, it’s hard to imagine this business model as a growth industry. An informed consumer would know that they are not paying for a special product, but are simply hiring someone who may or may not have any particular expertise to help them apply for something that they may or may not be qualified for and in any case, something that they can get for free.
Why don’t the companies explain this up-front? We assume that providing this information would not get them a lot of customers. This is how scams evolve. We applaud Governor Cuomo’s leadership in taking on these companies and hope that other regulators will follow their lead.
