Student Loan Consolidation

July 16, 2014

Dear Consumer Ed:

My son just graduated from college and now owes $25,000 in student loans. He has learned of a company that is offering to negotiate a lower interest rate and consolidate the loans. How does he know this isn’t a scam?

Consumer Ed says:

Now that your son is out of college, there are many options for loan consolidation and repayment plans. However, you didn’t say whether his loans were federal or private student loans. If your son has a Direct Subsidized Loan, Direct Unsubsidized Loan, or any other federal student loan, he should look into the Direct Consolidation Loan program offered by the federal government. This program allows your son to combine his federal loans into one payment with a fixed interest rate, and offers several repayment plans. If someone is helping him with this type of consolidation loan, he should never pay an up-front fee; any fees are deducted from the disbursement check.

If your son’s loans are private loans or do not qualify for the Direct Consolidation Loan program, he should look into a private company that offers student loan consolidation. Scams involving student loan debt relief have increased in recent years, but asking a few questions will help your son avoid being a victim of one of these scams. For example:

  • Is the private company attempting to pass itself off as a government agency? Some private lenders use government logos or markings to trick people into thinking they are associated with a governmental agency. The Department of Education does not advertise or solicit students to borrow money.
  • Is the company charging fees for services you could access for free? Contact the current loan provider first to determine if there are benefits such as forbearance, deferment, or repayment modification that would help your son’s situation before turning to an outside provider.
  • Is the company charging high fees or not disclosing fees? Get a clear answer in writing from the company as to what fees are paid initially and whether there is a monthly fee. If there is a monthly fee, find out what ongoing services are provided to justify the fee.
  • Is the representative trying to help improve your son’s situation or just selling a particular product? Consultation should include a discussion of all available resources, not just a particular loan consolidation program.
  • Is the representative using high pressure sales tactics? Many companies will resort to high pressure tactics rather than counseling and assistance. A legitimate provider will understand that your son is making an important decision and should give him time to consider all options before choosing a provider or program.
  • Does the company require the borrower to provide a power of attorney? This is significant and should only be given away when absolutely necessary, and only to a company you’ve researched (and trust).
  • Does the company require the borrower to provide a PIN number for the National Student Loan Data System (NSLDS)? The PIN number for NSLDS should not be given out over the phone, and should only be provided to a trusted organization.

The most important way your son can protect himself is to learn as much as possible about the industry and the particular lender. Shop around for other companies offering similar services, comparing fees and loan terms before committing to a particular service. Research its reputation before giving the company any sensitive information. In addition to a simple Google search, also check with the local Better Business Bureau to see if the company has had multiple complaints, or if the service is a known scam.

Finally, borrowers should trust their instincts. If you don’t feel comfortable with the company you’re working with, look for a different organization that provides comparable services. This is an important decision whose effect will last for several years, and could mean a difference of thousands of dollars over the life of the loan. As with school, do your homework! Get all of the information before making a decision about a lender.