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How to avoid a student loan scam

Don't fall victim to these student loan traps.

It seems like since loans have existed, so have scams. While payday loan scams have gotten a lot of press over the past decade, you’d be hard-pressed to find a type of loan that doesn’t have a shady underbelly.

Since federal loans are the most common way to borrow for school, you might think that student loan scams aren’t worth worrying about. And you might be right, if you know what to look out for. Here’s what you can do to protect yourself.

4 common student loan scams

First, it’s important to understand the difference between a scam and a bad deal.

  • Scam. A scam is when a company promises to provide a service or product and either doesn’t deliver at all or only partially.
  • Bad deal. A bad deal is when a company is upfront about everything it’s going to do, meets regulations, but doesn’t help you out as much as you’d hoped or costs more than you’d expected.

In other words, with a bad deal, legally there’s not much you can do. With a scam, however, you have the right to legally complain. Here are some of the most common student loan scams you should look out for.

1. The upfront fee scam

What happens: A company promises to get you a loan with the best terms, but you’ll have to pay a fee first — usually around 1% to 5% of your loan amount or a flat fee.

What’s sketchy about it: Legitimate lenders generally don’t charge a fee before providing a service. While you might have to pay an origination or application fee when you apply for a private student loan, under no circumstances should you borrow from a lender that charges a fee upfront.

Paying a company to help with your application? They also shouldn’t charge you an upfront fee unless it’s put in a third-party or escrow account, until you have your funds.

For example, the Student Advocates Group was cited by the Federal Trade Commission in 2019 for running a student loan scheme that “bilked millions out of consumers by charging illegal upfront fees and falsely promising to lower or even eliminate consumers’ loan payments or balances.”

2. The debt elimination scam

What happens: A company claims that it can eliminate or reduce your student debt for a fee. You may have found it through a Internet search, or you may have received a letter or email about it in the mail. Either way, it’s not a legit offer.

What’s sketchy about it: Although real student loan forgiveness programs are out there, scammers often claim to offer student loan forgiveness programs that don’t exist. Your income or career will influence your ability to have your debt forgiven. If you’re in a situation where you need your debt forgiven, it’s much safer to contact the federal government or your student loan servicer directly for options instead of going to an outside source.

3. The loan consolidation scam

What happens: A company charges you a fee to consolidate your student debt after you graduate — sometimes called a consolidation, processing or administrative fee — and then does nothing.

Why it’s sketchy: Federal loan consolidation is free, so you should never pay a fee for that service. If you want to consolidate your private student debt, you’d have to apply for student loan refinancing — which often offers consolidation too. The process is the same as any other loan, and you shouldn’t have to pay any upfront fees. In fact, many student loan refinancing providers don’t charge fees at all.

4. Law firm student aid company scam

What happens: A law firm, typically calling itself a “student aid company” claims it will negotiate your student debt down for a fee that’s sometimes thousands of dollars. It often asks you to sign a power of attorney agreement to hand over control of your student loan repayment accounts while it’s negotiating. Your loan goes into default.

What’s sketchy about it: First, federal student loan debt is non-negotiable, so any company that claims it can negotiate it down is trying to scam you. But even with private student loans, it’s not guaranteed that it’ll be able to negotiate your debt down. Many of these law firms say they’ll continue paying off your debts and pocket the money you give them instead. Aside from that, it’s best to steer clear of any company that claims to perform a service you can do yourself for free, like making your student debt repayments.

Many times, these law firms are former debt settlement companies that registered as law firms in 2010 to avoid a Federal Trade Commission’s (FTC) crackdown on debt relief scams. Most legitimate debt settlement companies don’t go anywhere near student debt.

8 red flags to look out for

Need help with your student loans, but want to avoid getting scammed? Stay away from any products with these warning signs.

  • Fees before you get your loan. One telltale sign that a company isn’t legit is that it charges a fee before it provides at least part of the service it’s supposed to deliver.
  • Fees for something that’s free. Any company that says it’ll help you fill out your FASFA forms, consolidate your federal loans or renegotiate your federal loan repayment plan is probably trying to scam you.
  • Promises loan forgiveness. Federal forgiveness programs are based on your employment history. There are no private student loan forgiveness programs. Some debt relief companies might promise to negotiate part of your loan down, but this generally involves defaulting first and isn’t guaranteed to work.
  • Lack of information online. If you can’t find information about what you’re getting into from the company’s website — or anywhere else — you might not be dealing with a legit company.
  • Pressure to sign up. Stay away from any company that pressures you into signing up for its services or otherwise tries to coerce you into giving it money. This tactic is particularly common with unsolicited phone calls.
  • You’re asked for your login credentials or Social Security number. No legitimate student loan assistance company will ask you for either of these. Some fake debt relief companies use them to lock you out of your accounts and ask you for payments.
  • You have to sign a power of attorney agreement. This allows a law firm to take over your account and request that you make your repayments through them, which they may or may not do.
  • Too good to be true. The golden rule of spotting a scam is anything that sounds too good to be true, is too good to be true.

How to tell if a student loan offer is legit

You’re in luck if you only have federal loans: Everything you need to know about your options and your servicer is right on the Federal Student Aid (FSA) website. With private loans, carefully consider which borrowers or servicers you use. Either way, it’s a good idea to take steps to check out the legitimacy of a company that’s not affiliated with the government.

Regardless of what type of loans you have, the FSA agency is a great place to start or keep up-to-date about the latest things to watch for. It’s partnered with the FTC to answer questions on Twitter and host webinars to help you spot scams and give updates on regulations.

Concerned about a specific provider’s legitimacy? You might want to verify the following information before you sign up:

  • The business’s address. Is this company really located where it says it is? Some scam companies put fake contact information on their website to look legit. If you’re suspicious about this, try reaching out to businesses nearby and ask if they’ve heard of your company. Or, reach out to the local Chamber of Commerce. If it doesn’t have an address, call and ask where they’re located.
  • The business’s website. Is there any real content on the company’s website? Does it fully disclose information about what you’re signing up for or provide a way to find out easily? Does it look professional? If not, you might want to avoid this company.
  • The terms and conditions. Is there language that seems vague and misleading? Clauses that could potentially hurt your personal finances or put your personal information at risk? Stay away.
  • Past customer experiences. When reading customer reviews, try to stick with sites like Trustpilot, which have antifraud practices and mechanisms in place to make sure reviews are as legit as possible. Be wary of message boards or other sites that have several comments that sound like they were written by the same person.
  • Payment methods. If the company prefers money transfers to some guy named George Smith in Topeka, you probably want to avoid working with it. Same goes for companies that only accept paper checks or cash — transfers that are difficult to trace and therefore hard to prove took place.

2 more scams to look out for as a college student

Student loan scams aren’t the only way scammers can trick you while you’re in school. You also might want to look out for these scams:

  • Social media scam. Some scam artists have started reaching out to college students through social media platforms. Common tactics include creating fake accounts for universities to win trust from students and gather information — often for identity theft.
  • Fake credit card scam. Fake credit card companies sometimes target college students, requesting your information and using that to steal your identity.

Compare student loans from legit providers

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Name Product APR Min. Credit Score Loan amount Loan Term
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0.94% to 12.99%
Not stated
Starting at $1,000
5 to 15 years
Rates start at 2.84% for residents of all 50 states.
Sallie Mae® Smart Option Student Loan for Undergraduates
1.87% to 11.97%
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Starting at $1,000
5 to 15 years
Choose from over 8 different options for undergraduates, law students and more.
SoFi Student Loans
1.89% to 11.98% with autopay
Starting at $5,000
5 to 15 years
Undergraduate financing with no late fees to US citizens with good credit.

Compare up to 4 providers

Help! I’m the victim of a student loan scam.

Unfortunately you’re not alone if you’ve fallen prey to a student loan scam. Here’s what you can do to get back on your feet — and make sure it doesn’t happen to anyone else.

  1. Cut off all ties with the company.
    First reach out to cancel any contracts you signed and demand a refund. It’s likely the company won’t respond. In that case, one option is to notify your bank that this company is no longer authorized to withdraw from your account and keep an eye on your financials. There’s a small chance you’ll be sued if you breach your contract, but if these companies are acting illegitimately, that’s not much of a risk.
  2. Reach out to your student loan provider or servicer.
    If you’ve hired a company to help you reduce your student debt, call whoever you make your student loan repayments to and explain the situation and ask what steps you can take. If you gave a company control over your account, you might need to send your servicer a notarized letter revoking this control.
  3. File complaints.
    To bring your scammers to justice and prevent others from being victimized, consider filing complaints with the Consumer Financial Protection Bureau, the FTC and your state attorney general. If you’re lucky, you might be able to get a lawsuit out of it. At least you’ll help raise awareness about this company with those that can actually do something about it. You might also want to file complaints with the Better Business Bureau, the Department of Education and your representatives in Congress.
  4. Find help.
    If you didn’t catch on to the scam before it was too late, chances are your personal finances are worse for wear. Consider reaching out to a nonprofit credit counselor to help you get back on track. You can find a government-approved counselor or program on the Department of Justice’s website.

Bottom line

When looking for help paying off your student debt, stay away from any company that promises forgiveness, wants money up front or in any other way makes you feel uncomfortable. And steer clear of any company that says it can help you with your federal loans — the federal government can help you navigate the theses loans for free.

If you need help deciding which type student loan to choose or want to know more about how they work, visit our comprehensive guide. Consider reaching out to your servicer about repayment options or consider refinancing if you’d like more favorable terms.

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