Student loans are not just a way to help you pay for school. For some, student lending is big business. Most of those businesses operate legally and some even help students better manage their debt. Others are predatory and use student loan consolidation scams to make a quick buck while harming borrowers.
If you’re struggling with your student loans, there are legitimate options to help you manage your payments and payoff strategy, but knowing what to look out for can help protect you from student loan consolidation scams and help you get out of debt the right way.
Red flag #1: If it seems too good to be true, it probably is
Just like the Nigerian prince who only asks for a $5,000 Western Union transfer in exchange for $10 million, student loan scammers often make offers that are too good to be true. As with nearly everything in finance, if it seems to good to be true, it probably is.
Look out for offers to instantly wipe away debt or magically get you out of default. In an honest, legitimate student loan consolidation offer, you are combining existing loans into one bigger loan. If an offer tells you that your total outstanding debt will instantly shrink when you sign up, that is a big red flag for loan consolidation scams.
If an offer tells you that your total outstanding debt will instantly shrink when you sign up, that is a big red flag for loan consolidation scams.
Red flag #2: You have to pay an upfront fee to consolidate
Federal student loan assistance is always free at StudentLoans.gov and through our helpful consolidation tool. If you are on the phone with someone about consolidating your loans and they ask for a credit card number or a fee, they are likely a scam.
The only way to lower your student loan balance is to make student loan payments. You can get a lower payment through debt consolidation in some cases, but shouldn’t have to pay extra for the privilege.
Some private companies do offer compelling student loan consolidation, but if you have any doubt, look to the Direct Consolidation Loan program at StudentLoans.gov, where you can fill out an application for free.
If you do have any fees, they should be paid at closing, not expected in advance.
Red flag #3: Poorly written, unprofessional offers
Legitimate student loan consolidation offers will be professionally presented and use impeccable grammar and spelling. If you get something that makes big promises but is poorly written and unprofessionally advertised, think twice before signing up.
Private student loan consolidation programs should always be clear about what they offer, what costs and commitments are involved, and how your student loans payments are changing. If anything is unclear or sloppy, take your business elsewhere.
Legitimate student loan consolidation
With so many red flags out there, it’s important to also know how to recognize a legitimate student loan consolidation option when you see it.
Real consolidation offers will take your existing loans and combine them into one new loan. When you consolidate, your loans are all rolled into one bigger loan. When you refinance, your old loans are paid off and you get a new loan for the total outstanding principal — the remaining balance — on your current loans.
Typically it’s only a good idea to consolidate if you are getting a lower interest rate than your old loans. Private student loans usually have a higher interest rate than government-backed loans, so borrowers with only Federal loans typically find the best deals when consolidating through the Federal consolidation program.
You can only consolidate your loans once, so never rush into the decision. Only consolidate if it makes sense for your personal situation and will save you money in the long run.
Consolidating to a higher interest rate is almost never good idea and consolidating isn’t free, so don’t pull the trigger unless the lower interest will save you more than the origination fee.
With student loan consolidation scams, follow your gut
While there are laws preventing scams and some states have taken action against student loan consolidation scams, the best line of defense is your good judgment and common sense.
If something seems odd, take a moment to assess if the offer makes sense. If it doesn’t, move on and apply for a Federal consolidation or look for a bank that will really help you better manage your student debt load.
If you do find yourself in a bad situation, reach out to your state attorney general and contact the Federal Student Aid office right away to see if you can get help before it’s too late.
Be informed and vigilant. Following the advice above is a great start, but always be guarded when working with any new company dealing with your finances.
Check out the company before you agree to anything, and follow your gut if something seems off. If you do, you’ll be in great shape and can move forward with a student loan consolidation the right way.
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