High student loan payments can feel overwhelming, especially for new graduates or borrowers carrying a great deal of debt. You may be tempted to sign up with one of the many companies out there promising to lower your monthly payments, or getting your loans forgiven for an upfront fee. However, most of these offers are actually just an outright student loan scam.
In order avoid falling for such scams, you need to understand both how the scammers operate and what student loan repayment or forgiveness options are available to you. Here are the following red flags to look for in a student loan scam, as well as helpful options for paying down your federal student loans.
3 red flags it’s a student loan scam
There are several warning signs that should make any borrower wary of student debt relief scams:
1. An upfront fee
Many student loan consolidation scams offer assistance to federal student loan borrowers for a small upfront fee. What they don’t tell you is that much of the “assistance” they are offering is available to every borrower for free from the federal government.
Consolidating your student loans, qualifying for a lower monthly payment, or even qualifying for student loan forgiveness, are all programs that are available to federal student loan borrowers absolutely free.
2. Promises that are too good to be true
Many student loan repayment scams play on borrowers’ desperation. These offers promise debt-relief that they cannot possibly deliver like immediate loan forgiveness or settlement of student debt that is in default.
But there is no such thing as immediate loan forgiveness. Additionally, student loan default is the responsibility of the borrower; it cannot be discharged to a third party. Any company that is offering either of these options does not have your best interests at heart.
3. Paid advertising
You have probably seen an advertisement for a student loan scam on the Internet. They often use terms or phrases that make them sound legitimate, such as “federal”, “national”, or even “Obama wants to eliminate your student loans!”
However, if a for-profit company is paying to advertise student loan services, then you should back away. The services they are offering are generally available to federal student loan borrowers for free. The fact that they have an advertising budget means they are making money off of borrowers who are unaware of their rights.
Know your payment and forgiveness options
The best way to protect yourself from a student loan scam is to know what your options are.
StudentLoans.gov or StudentAid.ed.gov are the two websites set up to help federal student loan borrowers navigate their options. Since many student loan scams claim to be affiliated with the Department of Education, it is always a good idea to double check their url. If the program does not use either of these urls, then it is probably a scam.
Federal student loan borrowers can also take advantage of the following government assistance programs for free:
- Direct Consolidation Loan is a government loan program that helps student loan borrowers consolidate multiple federal education loans into a new single federal loan. While Direct Consolidation can potentially lower your monthly payment, it may not necessarily save you money over the life of the loan. In fact, your term may be extended, and your overall rate may change with the consolidation.
- Graduated Repayment gives you lower payments initially on select federal student loans. However, there will be an increase in your monthly payment amount every two years within a ten year period. This plan can be very helpful to graduates with a low starting salary who anticipate earning more as their career progresses. Nonetheless, you will pay more over time with graduated repayment compared to the standard plan.
- Extended Repayment allows you to stretch out your repayment timeframe to up to 25 years on federal student loans. Your payments can be either fixed or graduated. The monthly payments will be smaller with this plan, but you will pay more over time.
- Revised Pay As You Earn Repayment Plan (REPAYE) is only available for Direct Loan borrowers. REPAYE reduces your monthly payments to a maximum of 10 percent of your discretionary income, and this payment will be recalculated once per year. If you have not repaid your loan in full after 20 or 25 years, your outstanding balance is forgiven. Depending upon your income and other factors, your payment may be higher than it would be under the standard repayment plan. Plus, you may have to pay income tax on any amount forgiven.
- Pay As You Earn Repayment Plan (PAYE) is also only for Direct Loan borrowers. As with REPAYE, the PAYE program reduces your monthly payments to a maximum of 10 percent of your discretionary income. PAYE also recalculates your payment annually. However, unlike REPAYE your monthly payments can never be larger than they would be under the standard repayment plan. You can also have your loan balance forgiven after 20 years of payment under this plan, and you should be prepared to pay income tax on the forgiven amount. In order to qualify for PAYE, you must have a high debt relative to your income.
- Income Based Repayment (IBR) reduces your payment as low as 10 to 15 percent of your discretionary income. Your payment is recalculated each year, although you will never have a higher monthly payment with IBR than you would with a standard repayment plan. After 20 or 25 years, any remaining balance can be forgiven. However, you may have to pay income tax on the forgiven amount. In order to qualify, you must have high debt compared to your income.
- Income Contingent Repayment (ICR) is only available for borrowers with Direct Loans. Under this repayment plan, your monthly payment will be either 20 percent of your discretionary income or the amount you would pay on a 12-year fixed payment plan, whichever is lower. Your monthly repayment amount is recalculated annually. If you have not paid off your loan in 25 years under this plan, you can have the balance forgiven, although you may owe taxes on the forgiven amount.
- Income Sensitive Repayment is only for Stafford loans and FFEL PLUS loans. With this repayment plan, your monthly income is based on your annual income, and the repayment term will last up to fifteen years.
- Public Service Loan Forgiveness is a federal program designed to forgive student loan debt for employees of certain types of public service jobs, such as federal, state, local, or tribal government. Public service employees with qualifying student debt may be eligible to have their federal student loan forgiven after 10 years of repayment.
If you’re looking to consolidate your student loans, check out Student Loan Hero’s Consolidation Tool. It’s the newest tool available to Student Loan Hero users who sign up for an account. It’s completely free, and the consolidation tool makes it easy to sign up for a Federal Direct Consolidation Loan or an income-driven repayment plan.
Student Loan Hero’s Consolidation Tool allows you to sync all of your federal student loan data with your Student Loan Hero account. The tool then walks you through the steps to complete your application before submitting your form electronically.
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