NerdWallet's Smart Money Podcast - Inside student loan scams

Episode Date: August 16, 2017

Are companies that offer to reduce or eliminate your debt legit? We hear Selina’s story about what happened with her $60,000 student debt and tell you how to get real help.

Hello, and welcome to NerdWallet's Smart Money Podcast, where we answer your real-world money questions in 15 minutes or less. I'm your host, Sean Piles, and joining me is my co-host, Dayana Yochum. We have a special episode for you today. It's a story about something many listeners, including myself, are all too familiar with, student loans. If you have student loans, you've probably come across ads on TV, radio, or Facebook from companies offering to relieve your college debt. Or maybe you googled

something like student loan help and found listings of firms that claim they can lower your monthly payments or even forgive your debt entirely. Yeah, and unfortunately these offers are rampant. I get offers in the mail all the time that look like official government notices of a very limited time offer to refinance my student loans. And only upon close inspection can you tell that it's just some company that's looking to profit off of my personal mountain of student debt. Straight to the shredder with those, Sean. Yes, exactly. Well, at NerdWallet, we hear from borrowers all the time who are confused about whether these companies are legitimate or not. And if you've ever wondered if those claims are too good to be true, the answer is they are. As NerdWallet's public interest reporting team found after spending six months investigating public records related to student debt companies all across the U.S. More than 130 firms with histories that genuinely give borrowers reason to be wary.

We're talking about court judgments, lawsuits, and excessive tax liens for overcharging and misleading borrowers. Many of the victims of these companies barely have enough to cover their monthly expenses, let alone their student loans. So NerdWallet education reporter Teddy Nykel recently talked with one such person, Selena Leonard, a 25-year-old living in Mount Prospect, Illinois. Here's her story. I had no idea that that's how they were doing the monthly payments.

Like, I guess I hadn't looked at it hard enough, but that was the biggest red flag ever. This is Selena. She's one of the 44 million people in the U.S. with student loans, and she has $60,000 worth of them. That debt got her into the situation you just heard her talking about, and we'll get into that, but first, let's start from the beginning. Here's Selena again. you do, but you're going. And I'm like, hey. My parents and I thought that I was going to get more in financial aid. My mom had lost her job right before I went into college. So they thought that the household income was like $90,000 a year, but it actually was closer to like $40,000 a year.

The first year to my financial aid that I got from FAFSA was just nothing. We wound up having to take out private loans, federal loans, just to cover it all. Selena graduated in 2015. That was after two years of community college and three years at the University of Illinois at Chicago. She landed a full-time job working at a veterinary hospital. However, the job only paid about $11 an hour, which wasn't enough to cover all her student loans and living expenses. It was not a whole lot to live off of, and so I frequently had to choose between paying rent, paying food, or loans. When it came to actually like paying the loans, I had no idea what I was doing. Federal loans were like, oh, you got to pay $400 a month. And my private loans were like 200 some odd dollars a month. And I'm

like, ah, I don't have this kind of cash flow. So it was very overwhelming. Selena's engaged and her fiance's mom knew how stressed she was about her student loans So Selena's soon-to-be mother-in-law told her about a company she'd seen advertised on Facebook Selena says the company claimed it could consolidate her loans give her a lower monthly payment and a lower interest rate She said the company sounded a little bit shady but says she was desperate So she decided to give the company a call. When I called them, I explained the situation and they were very professional and they were like, you know, we work with the Department of Education and we'll be able to access your account and

consolidate the loans for you, submit the paperwork for income-based repayment plans, and we'll just get it all done for you. And this came with the stipulation that you pay, it was like a $350 fee at the beginning, and then there were monthly payments going forward, which I kind of like glossed over, but I was like, yeah, whatever, that's fine. And were they able to do those things that they promised to do? Yeah, yeah. The payment plan got put into effect, and because I made not enough money to live off of, the monthly payment turned into zero dollars a month, which was great, and they consolidated my loans. Selena was super relieved to have a lower monthly payment, but then she started noticing that the company continued to charge her $39 every month. She called the company to ask about it,

and she says they told her it was a monthly management fee. She found that to be a little weird, but figured that $39 a month was a lot less than $400 a month, which was what she was paying before on her student loans. So she went with it. And then she didn't hear from the company until about a year later when it was time to recertify for her income-based repayment plan. Once we had to redo my paperwork, that's when everything went downhill, and it went downhill so fast. When my paperwork needed to get redone, I first got an email from the federal loan servicing company rather than the third party company. And so the federal people were saying that, hey, we need your repayment plan paperwork, so you just need to fill out this form, send it back to us, whatever.

I printed out the paperwork and I filled it out and faxed it over because it had to be faxed. It wasn't until the next day that I got a call from the third-party company, and they were like, yeah, so it's time to redo your paperwork. And I was like, oh, I already did it. And they were like, what? And they got really upset, and they told me that it was, they didn't recommend their customers to do this and to take care of the paperwork on their own, that there's something that could be missed. There's a lot of crossing T's and dotting I's,

and they were really kind of condescending about it. So they told me they were going to take a look at my paperwork and give me a call back if there was anything that they needed to change. Selena says she never heard from the company, so she tried calling to follow up about a week later and was sent to voicemail. She left a message asking for a call back and got no call back. In the meantime, there were some problems with the paperwork she submitted to her federal student loan servicer. My paperwork actually got denied with the federal loan company because they needed my tax information. So I had to resubmit all the paperwork with the tax information, with my income history, all that stuff.

And then that got sent on to review, and that was in review for a month. But I didn't defer my loans in the meantime because that just wasn't something that they recommended that I do. So payments were piling up. It back to that four hundred dollars a month they kept sending me emails being like your account is uh defaulting and very stressful because I'm like yeah I know I'm trying to work on it and I kept trying to call the uh third party company and they were just not anywhere. They weren't answering their calls. I eventually sent an email being like, you know what, I am apparently on my own with this. Please take me off of your services. I don't need your services any longer. I'm taking care of this. Apparently they never got that email either because they kept charging the monthly payment.

I didn't know what to do, so I had to contact my bank and be like, please stop transactions from them. So my bank was like, oh yeah, we can do that. Oh, wait, they're writing checks in your name. So, no, we can't actually stop these transactions. And that gave me a bit of a heart attack, because what? They were writing like electronic checks in my name. And then in the part where I would normally sign,

it was a little stamp being like, this is a totally legit check and it's been approved by the signer and everything's fine. And I'm like, this is the most shady thing I've ever seen. So Selena knew that the company had been charging her $39 a month, but she didn't know that it had been writing checks in her name. She says she must have given the company her bank account information at some point. She was so desperate when she signed up, she says, that she would have given them anything. To deal with the situation, Selena had to close that checking account and open a brand new one to keep the company from writing checks for $39 a month. There's a bit more. So after all this happened, her repayment plan finally got approved

through her federal student loan servicer. Since her income had gone up slightly, her payment on the income-based plan went from $0 a month to $59 a month. It was an increase, but still way more manageable than $400 a month. Three days after her repayment plan got approved, she got a call from the third-party company again. It had been about two months since she'd last heard from them. They called me and they're like, oh, so we looked at your paperwork and everything was great.

And so it's all gone through and your new monthly payment is $59, which is really great. And our monthly payment is going to go up because your monthly payment with the federal loan people went up. But yeah, we got that approved. So you're all good to go. And I was like, no, you didn't. That's all the work that I did. While she had the company on the phone, she asked again to cancel, and this time they finally agreed. And with that, Selena's stressful

student loan saga was finally over. She estimates she lost about $1,000 to the company, money that would have been well spent paying down her student loans. She still owes about $58,000. It's still a big chunk of change that I'm responsible for, and it definitely means that my fiance and I aren't looking to move into a house anytime soon, but it's not as bad. It's much more bearable, I guess. Being on an income-based repayment plan is what makes her student debt feel more bearable, I guess. Being on an income-based repayment plan is what makes her student debt feel more bearable. Reflecting on what happened to her, Selena says she knew she could sign up for the repayment plan by herself for free, but she was so frustrated with the process and so desperate for help that she didn't care about paying a third-party company to do it for her. And she didn't bother to

question whether the company was actually affiliated with the Department of Education as it claimed to be. When I first signed up, I was so desperate that I'm like, you could tell me you're the queen of Russia and I'll just go with it. I was just so desperate for help that I, like, they said they were affiliated and I'm like, that's great. I don't care. They could have been part of the mob, and I'd have been like, this is fine. I first talked to Selena about a year ago, in the summer of 2016, a few months after she first signed up with the company. At the time, I could hear the desperation and uncertainty in her voice. But now, with this ordeal behind her, Selena has a sense of confidence about her student

loans that wasn't there a year ago. Now that I've thoroughly navigated the federal loan website because of all of the craziness with the paperwork, now I'm like, oh, I know exactly where every link is and I know exactly where I need to go for all of this stuff. So now I do. I tell everybody about like, you know, how much debt I have because I'm just like, no, it's something that if you keep it to yourself, then it's going to cause more anxiety and it's going to make you feel isolated and like you're smothering in debt that you don't want to talk about. And I'm just like, no, I'm going to be clawing my way out of this for 10 years. This is going to be a part of my life for a really long time. So I'm just going to be really open about it.

Thanks Teddy, and thanks to the entire public interest reporting team for digging into this important topic. Let's get to the takeaway tips so listeners can avoid getting snared in a student debt relief scam. First of all, know that you don't have to pay to get help handling your student loans. If you have federal loans in particular, there are programs like income-driven repayment plans that can lower your monthly payments as well as loan forgiveness plans. Beware of companies that charge you a fee to enroll in them because you can sign up for free through the Department of Education's website or your federal loan servicer. You can look for the

links on our show notes page at nerdwallet.com slash podcast. If you do pay, know how to shop smart. Most nonprofit credit counseling agencies offer student loan help. They'll often charge a fee, maybe between $50 to $200, depending on the agency, but that might be worth it to help you get a grip on your loan repayment. Regardless, before signing on to any company's plan, check out NerdWallet's student loan watchlist, which flags more than 130 shady companies. And finally, if you've been a victim of one of these scams or you come across a questionable company when you reach out to get help, report it. Federal and state agencies have cracked down on some student loan scams, but there are so many that are still operating. Government and officials rely on consumer complaints to determine which companies to go after, and sometimes they can even force them to refund consumers that were

harmed. You can report your experience to the Consumer Financial Protection Bureau, the Federal Trade Commission, or your state's Attorney General office. And that's it for today. You can get more on this at nerdwallet.com slash podcast. Do you have a money question of your own? You can text us or call us at 901-730-6373. That's 901-730-NERD. Or you can email us at podcast at nerdwallet.com. And finally, a brief disclaimer courtesy of the NerdWallet legal team. Your questions are answered by knowledgeable and talented finance writers,

but we are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes. And with that said, keep it nerdy.