Warning: Don't get screwed by student loan debt 'relief' offers

The crippling financial effects of student loan debt have caused an increasingly widespread sense of desperation — with more and more people looking for any possible way out.

It’s certainly understandable, considering the fact that more than 44 million Americans are now struggling to pay back more than $1.5 trillion in student loans.

But unfortunately, the situation many of these people have found themselves in has made them prime targets for scammers. When seeking help, what many borrowers don’t realize is that all those debt relief offers they keep hearing about are really just a ploy to try to rip you off.

So it’s crucial that you know what to look for when considering your options and that you understand which programs can offer you legitimate help.

2 big warnings for student loan borrowers seeking help 

1. Loan consolidation scams

When we talk about a student loan “scam,” it typically refers to an offer from a company that claims it can “help” you with your federal student loans by consolidating them for a “small fee.”

These solicitations may be sent to you in the mail or you may have gotten a phone call from someone claiming they can help. Ignore it!

If you have federal student loans, there are no fees for debt consolidation!

If a company reaches out to you offering to consolidate your loans in exchange for a fee — they are trying to rip you off! 

What’s causing so many people problems is that these companies typically don’t make it clear to consumers that the Department of Education offers this same service FOR FREE. So borrowers who are desperate to lower their payments are getting duped into paying for something that they can do entirely on their own. 

Legit options for federal student loan borrowers

In fact, loan consolidation can be a great way for student loan borrowers to get a more reasonable payment plan or even get their loans forgiven. 

Consolidating federal student loans can not only help borrowers keep track of payments (if they have more than one loan), but it also provides a way to qualify for different types of repayment and forgiveness plans. For example, consolidating some types of loans will qualify you for income-based repayment programs. These programs limit monthly student loan payments based on a percentage of income — to help borrowers reduce their payments and pay on time. There are also programs that include loan forgiveness, which means the remaining balance on a borrower’s loan is forgiven after a certain number of years. Some types of loans don’t require consolidation for you to participate in an IBR or forgiveness program. 

Check out the Department of Education’s website to learn more on how the process works and the different options available.

Private student loans

If you have private student loans, unfortunately, there are no similar programs to help with repayment of private student loans, which is partly why private loans should be your absolute last resort when borrowing for school. But, there are ways to refinance them — which can get you a better deal.

2. Refinance offers to avoid

Unfortunately, falling for phony consolidation offers isn’t the only big mistake borrowers are making. Refinance offers that seem like a good deal are leaving people with even fewer options than they started with.

If you aren’t familiar with how it works, refinancing is different from consolidation. With refinancing, you’re taking out a separate loan with a lender that pays off your existing loan. So you take out a private loan with a private financial institution, that company pays off your current loan and then you repay the new lender.

You’ve probably seen solicitations for “great” refinance offers that can lower your interest rate and reduce the total time it takes you to pay off your student loans. They are out there, but you need to be careful.

Be very, very careful with these offers.

The reason you almost never want to refinance federal loans is because you lose eligibility for federal programs that can help you with your student loan payments and repayment plan, like those mentioned above. When you refinance through a private lender, you have pretty much zero wiggle room and that lender is coming after you the moment you hit an obstacle. 

Another reason refinancing is dangerous is because many refinance offers include a variable fixed interest rate, which means even if the initial rate is lower than the rate on your current loan, you still have no idea what you will be paying for that new loan in the long run because the rate could change any time.

So if you’re struggling to pay your federal loans, look into your options and ask what help you can get with your monthly payments.

When refinancing does make sense

If you have private student loans, refinancing could be a good option for you to get a lower interest rate.

Typically to get the most savings out of a refinance offer, you’ll have to pay higher monthly payments. But with a lower interest rate, the total cost of the loan will be less by the time it’s all said and done. So if you can manage the higher monthly payments, that’s usually your best bet with a refinance offer.