U.S. Sens. Tom Harkin (D-Iowa), Barbara Boxer (D-Calif.) and 21 other senators sent a letter to the Secretary of State and officials at the Federal Trade Commission and the Consumer Financial Protection Bureau urging them to “look closely” at alleged practices of some debt relief companies.
The joint letter, dated July 11, comes in the wake of a report by the National Consumer Law Center that called abusive some of the practices of some companies it looked at for the report.
NCLC Report Blasts Dishonest Student Debt Relief Services
The July report makes a case that the student loan debt relief industry is riddled with companies that tip-toe the lines on violating consumer laws, mislead financially vulnerable clients, fail to provide services after they charge hefty fees and abuse customers in other ways.
Researchers at the National Consumer Law Center, a Boston-based nonprofit that advocates on behalf of low-income individuals, made those conclusions in its recently released study, “Searching for Relief: Desperate Borrowers and the Growing Student Loan Debt Relief Industry.”
“Sadly, many borrowers trying to get ahead through education end up with nothing but mountains of debt,” researchers say in the report. “Their problems only get worse when unscrupulous businesses take advantage of them. Too many companies claiming to offer help are compounding the pain of vulnerable consumers.”
In fact, the report states: “This practice is not inherently abusive, but it raises a number of warning signs.”
There are reputable and honest firms in the marketplace capable of helping student debtors work through the federal government’s complicated debt relief programs, while charging fair fees for their services.
These companies argue that their student loan consolidation services are similar to those provided by tax preparation firms: Individuals can always file their taxes on their own, free of charge, but many rely on the paid services of a trustworthy accountant who can navigate complicated Internal Revenue Service code and file their taxes for them.
Key Findings about Debt Relief Companies
The report shows an NCLC employee, or “secret shopper,” called 10 “randomly selected student loan relief companies,” and reviewed their websites and those of 10 additional firms that were not called. In addition, the agency examined a collection of actual contracts between several companies and their customers, monitored online complaints, and discussed their findings with other advocates, as well as with state and federal regulators.
The “secret shopper” provided the debt relief companies with the amount of debt incurred through federal and private loans, place of employment, salary and estimated monthly loan payments.
NCLC researchers said:
- Some student debt relief companies mischaracterized the federal government’s programs as their own.
- Many charged high initial fees — up to $1,600 in some cases, while some firms refused to disclose their fees.
- Companies routinely provided inaccurate information about student loan consolidation, wage garnishment, rehabilitation, bankruptcy, and other critical topics.
- Firms discouraged borrowers from handling their own cases, even though they could have done so at no cost.
- While describing their employees as “experts,” many companies merely hired salespeople and paid them on a commission basis.
- Some firms required borrowers to grant them powers of attorney; others neglected to safeguard their customers’ online privacy.
- Many companies displayed potential violations of consumer protection laws, “including the federal Credit Repair Organizations Act (CROA), the Federal Trade Commission (FTC) Telemarketing Sales Rule, state debt settlement and debt management laws, and unauthorized practice of law provisions.”
Honest Student Debt Relief Companies Provide a Valuable Service
The federal government allows student loan borrowers to postpone payments through deferment and forbearance, consolidated loans, discharge loans in limited circumstances and choose from affordable repayment options at no cost to them.
“On our website, we give the information to anyone who wants to do this on their own,” says Jon Robinson, director of operations at Debt.org. “But most [of the people] who call want to forget about it and have us take care of everything.”
While the report details possible abuses, certain practices that trouble the NCLC may still be necessary when performed diligently.
There is a great deal of work involved in order to help a student debtor consolidate his or her loans under the government’s loan consolidation program. A borrower may have more than a dozen different loans — public and federal — owed to different loan processors with different interest rates.
Some debt relief companies charge an upfront fee because their staffers immediately start to process the consolidation once a contract is signed.
In addition, power of attorney or a student’s private PIN may be necessary for a company to proceed with the loan consolidation paperwork. “Most people don’t know the specific loans, lenders or amounts they owe and that information is needed to process their paperwork. The only way to obtain that information is by using their Federal Student Aid PIN,” Robinson said.
Power of attorney is also needed if someone’s loans are in default and in need of rehabilitation prior to consolidation. Creditors won’t speak with anyone but the loan holder without a power of attorney.
Critics of unscrupulous debt-relief companies, including NCLC, charge that the government’s programs to deal with student debt, as helpful as they are, are nonetheless “unnecessarily complex.”
“An informed consumer with resources may feel it is worthwhile to hire someone to help navigate the complex government student loan system,” the report shows. “This is not necessarily abusive if the fees are disclosed properly, and the company is in fact what it says it is, is competent and up to date on the complex laws, and in compliance with all relevant consumer protection laws.”