Alleged Student Loan Debt Scams Face Lawsuits

Another round of alarms sounded in the trillion-dollar student loan crisis when the Illinois Attorney General accused two student loan debt settlement firms of scamming borrowers.

Illinois Attorney General Lisa Madigan sued First American Tax Defense and Broadsword Student Advantage, two debt settlement companies that allegedly charged exorbitant upfront fees and promised bogus services to borrowers seeking alternative ways to repay student loan debt.

The lawsuit, filed in Chicago, says that American Tax Defense and Broadsword Student Advantage advertised heavily on radio throughout Illinois, offering a myriad of solutions and a false affiliation with the U.S. Department of Education (DOE).

Because the DOE and federal government have so many resources for collecting debt (income tax returns, social security payments, wage garnishing), it is rare they ever accept a debt settlement.

Student loan debt reached $1.2 trillion in 2014. More than 40 million Americans owe it and the average amount for recent college graduates is $29,000. Unemployed or under-employed borrowers are constantly seeking remedies to help them deal with the burden. Student loan debt scam companies prey on desperate borrowers, selling free government services as their own and over-promising debt relief like forgiveness and settlement.

Options such as debt consolidation, income-based repayment plans and public service loan forgiveness are available to ease the strain, but borrowers either aren’t aware of them or have become desperate in their search for a way out.

The Illinois’ suit says the debt settlement companies charged up to $1,200 in upfront fees, falsely claimed they could cut student loans in half or eliminate them, negotiate lower monthly payments and remove wage garnishments.

The companies also advertised something they called an “Obama forgiveness program” to bail out borrowers. No such government program exists.

“My office will be aggressive in cracking down on scam operations that prey on student loan borrowers for profit,” Madigan said, through a press release from her office.

Debt Settlement Rarely an Option for Student Loans

Experts say debt settlement is among the least attractive options for dealing with student loan debt and the least likely to reach an agreement with the DOE.

The goal of debt settlement is to offer a lump-sum payment to creditors and hope they will accept it to settle the debt. The lump-sum is typically a fraction of the actual amount owed, but because the federal government has so many ways to collect money, debt settlements are few and far between.

The federal government wants to recoup at least the principal balance owed, and with all those resources, it usually will. The DOE reports a recovery rate of 110.6 percent ($110.60 for every $100 owed) on defaulted loans from the Direct Loan program.  It reports a recovery rate of 122.1 percent ($122.10 for every $100 owed) on Federal Family Education Loans (FFEL).

In other words, they don’t settle often. Struggling borrowers would be better served looking for help through programs offered by legitimate agencies or the Department of Education.

 

Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it seven years ago, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering college and professional sports, which are the fantasy worlds of finance. His work has been published by the Associated Press, New York Times, Washington Post, Chicago Tribune, Sports Illustrated and Sporting News, among others. His interest in sports has waned some, but his interest in never reaching for his wallet is as passionate as ever. Bill can be reached at bfay@debt.org.

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    Sources:

    1. Yerak, B. (2014, July 14) Illinois AG sues student loan debt settlement firms. Retrieved from http://www.chicagotribune.com/business/breaking/chi-student-loan-debt-lawsuit-20140714,0,4350725.story
    2. Kieler, A. (2014, July 14) Illinois Files suits Against Debt Settlement Companies That Allegedly Scammed Student Loan Borrowers. Retrieved from http://consumerist.com/2014/07/14/illinois-files-suits-against-debt-settlement-companies-that-allegedly-scammed-student-loan-borrowers/
    3. NA, (2014, July 14) Madigan Files Lawsuits Over New Student Loan Debt Scams. Retrieved from http://www.illinoisattorneygeneral.gov/pressroom/2014_07/20140714b.html
    4. NA, (2014) Default Consequences. Retrieved from http://www.asa.org/in-default/consequences/default.aspx
    5. Kantrowitz, M. (2014) Student Loan Debt Settlements. Retrieved from http://www.finaid.org/loans/settlements.phtml