Several debt settlement companies have been running advertisements that offer to consolidate a borrower’s student loans, reduce loan payments and rehabilitate defaulted student loans, for a fee. These advertisements appeal to borrowers who are struggling to repay their student loans but who are unaware of their repayment options.
Borrowers can consolidate their federal student loans for free at StudentLoans.gov. They can also obtain flexible repayment plans, such as extended repayment and income-based repayment, without needing to pay a fee. There are also free options for rehabilitating defaulted federal student loans.
So, in effect, these companies are charging a fee for services that borrowers could obtain on their own, for free.
There is no law against charging a fee for a free service. For example, tax preparers charge fees to help people file their income tax returns. But, some of the companies that help borrowers consolidate their student loans may have made false and misleading claims about the services they provide or falsely suggested that they are affiliated with the U.S. Department of Education’s direct loan program.
Lack of Awareness of Free Options
Some borrowers may be unaware that they can consolidate their federal student loans on their own, for free. When the Health Care and Education Reconciliation Act of 2010 ended the Federal Family Education Loan (FFEL) program, it ended the ability of banks and other financial institutions to make new federal education loans, including federal consolidation loans. Since July 1, 2010, all new federal consolidation loans have been made through the federal direct loan program.
When borrowers of FFEL loans ask their lenders about consolidation loans, the lenders respond that they no longer make consolidation loans. Some lenders tell borrowers that they can consolidate through the direct loan program. But, others do not, because then the lender will lose the loans, including the future interest payments on the loans. This may lead some borrowers to believe that consolidation is no longer available.
Approaches to Increasing Borrower Awareness
There are several possible solutions that address the lack of awareness of student loan repayment options:
- Congress could pass a law requiring clear and conspicuous disclosures in such advertising and on the advertisers’ web sites that borrowers can consolidate federal education loans on their own for free, with links to StudentLoans.gov. Congress took a similar approach in 2008 with paid preparers of the FAFSA (Free Application for Federal Student Aid), in 20 USC 1090(d).
- The U.S. Department of Education could run its own advertising campaign to publicize the availability of the federal government’s free federal student loan consolidation services to existing borrowers.
- The U.S. Department of Education could also improve the counseling of new borrowers of federal education loans. Student loan borrowers who graduate go through exit loan counseling, which reviews their available repayment plans. But, borrowers who drop out of college do not necessarily go through exit loan counseling. These borrowers are four times more likely to default than borrowers who graduate, and account for 63% of student loan defaults. Requiring more frequent loan counseling, perhaps on an annual basis or whenever the borrower gets a new federal student loan, while the borrower is in school might reduce the default rate by making borrowers more aware of their repayment options.