Warning: Debt Consolidation Scams and Mistakes You Can Easily Avoid

4848301770_523ea055cb_oStudent debt consolidation – you see ads for it all the time. Maybe you’re inundated with email, snail mail, Facebook ads, etc. Consolidating any kind of debt can be scary – especially when we’ve heard about all the ways it can go wrong.

Before you decide whether or not consolidation is right for you, make sure not to dig yourself into a hole by avoiding the inevitable. Sure, that 6-month grace period of not having to make payments on your loans after graduation is nice, but don’t get used to it.

If you don’t begin making payments on your student loan balances after this timeframe, your interest will accrue and your debt will just continue to grow, and faster.

The Consumer Financial Protection Bureau estimates that there is currently $1.2 trillion in outstanding student debt in the U.S. Around 7 million of these people are currently in default. This represents a market ripe with potential for scammers. As their debt grows, most graduates become overburdened, anxious, and desperate – a combination that makes them ripe for trickery.

Most scammers try to take advantage of students during their six-month grace period after graduating, before their first payment is due. Be extra cautious during this time.

A List of Red Flags:

The upfront fee scam – This is a big one. It involves a “company” declaring that they can squash your interest rates for a low upfront fee! What these companies are really doing is charging you a premium fee for them to go to your lenders and arrange some kind of debt forgiveness or consolidation. You can do this yourself in less than 10 minutes.

No legitimate lender will require an upfront fee. Some lenders might require a percentage payment on your balance once everything is said and done, but none will charge you right off the bat. Private lenders might charge an origination fee, but this is negotiable – pay close attention to wording.

The elimination scam – Someone contacts you offering to wipe out your student debt! Exciting, huh? Too bad this is impossible. No one can eliminate your private student debt. Anyone who contacts you offering to do so is a scammer.

Obama forgiveness scam – President Obama has been very vocal in his efforts to ease the burden of student debt. Make sure to familiarize yourself with the ins and outs of Obama’s initiatives, as they are constantly evolving. A good place to start is the gov website.

Power of attorney – This is a huge no, no. Never sign paperwork that allows someone else to hold power of attorney over you without a lawyer present. If you’re dealing with a company that asks for power of attorney, run; don’t walk, the other way.

No phone number, no specific location – Many fake consolidation companies will hide behind websites, making it impossible for the borrower to talk to an actual, real person. Every legitimate company should have a means by which consumers can contact them, other than the Internet. If you cannot get through to a real person, be very wary.

How to Find a Reputable Debt Consolidation Company

Let’s say you’ve seen an ad for a company that promises to refinance all of your student debt for a great interest rate. How do you go about finding out if this company if legitimate? Here are a few tips:

  1. Check to see if they’re registered with a couple of government agencies. The Association of Independent Consumer Credit Counseling Agencies and The National Foundation of Credit Counseling have lists of companies that offer legitimate debt consolidation services. Keep in mind that not all companies will be registered in either one of these databases, but many are. If you find the company you’re researching on one of these lists, you can trust that they’re reputable.
  2. Check the BBB (Better Business Bureau) website. The BBB lets consumers rate different businesses on a scale from A-F. It also allows users to search open court cases against companies. Sometimes you’ll come across a company that doesn’t appear on the site – this doesn’t necessarily mean they’re not legit. But those companies who have built up a reputation for scamming will generally appear on this site with bad ratings.
  3. Call your current lenders. Most private lenders are willing to work with you to come up with a plan for you to pay back your debt. They want their money – and they’d rather you pay than go into default.

So, What’s a Girl or Guy to Do?

In an article for NBC News, the National Consumer Law Center’s staff attorney, Deanne Loonin, had the following to say about scammers:

“There’s a whole range of misrepresentations. They either make up a program that doesn’t exist, or they describe a government program and make it sound like it’s their own or claim to have some special way to access it for you.”

If you want to be 100% sure that you won’t fall victim to a scam, call the companies through whom you already have loans. Ask them about any forgiveness or consolidation programs they have. Make yourself a list and go from there.

In general, you should never give anyone your social security number or bank account information via email. If it feels like a scam – emails written in poor English or deals too good to be true – it’s probably a scam.

You can also check out the Consumer Financial Protection Bureau or the National Consumer Law Center websites to get more information on legitimate programs.

In the end, a consolidation company should make you feel comfortable about your decision to refinance. If, after dealing with a company, you do not feel at ease, by all means, take the time to check them out. Student debt consolidation should be a positive, empowering step on the road to getting out of debt.