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Refinancing a Student Loan? Be Careful Who You Trust

Problems with Student Loan Debt

 

Many businesses have sprouted up to tackle the huge problem (or, in their case, opportunity) of ever-mounting student loan debt.  Refinance and consolidation companies promise low rates, easy payments and helpful advice. As it turns out, not all student debt companies have been operating on the right side of the law.

Student loan companies are being sued

Charged by the NY attorney general with conspiring to lie to borrowers and charging baseless fees (considered usury in many states) Debt Resolve Inc. and some of their affiliates have been given a judgment to pay $2.2 million.  With some of the businesses operating out of California and Minnesota, their defense team is negotiating a deal to suspend the judgment in favor of a $50,000 fine and assurance that the businesses will comply with New York State usury laws.

 

In another case, a $90 million class action lawsuit against student loan servicer Great Lakes Educational Loan Services Inc. asserts that Great Lakes added usurious interest to refinanced student loans.  While a borrower’s loan application was being processed, Great lakes would temporarily suspend the required loan payments. Once the loan was approved and transferred, payments resumed with additional interest being tacked on to account for the suspended period.

 

Apparently, Great Lakes acknowledged that the practice violated Federal laws but continued the practice for several more years.  They claim they are not at fault as they have already completed borrower remediation. Ultimately, the court will decide.

Five ways student loan debt companies scam you

If you are in the market for student loan refinance or consolidation or have begun to receive unsolicited offers from lenders, be on the watch for these most common traps to avoid:

 

Added time to your payment.  Some refinance companies find a way to earn more money from you even while giving you a discounted rate.  Check the full terms to see what your total obligation will be by the end of the loan – principal plus interest.  If the loan term is longer than you have now and the math shows you will end up paying more, skip it.

 

Your debt will be forgiven.  If you receive an email from a company that says they are affiliated with the Department of Education and can forgive your student debt, you are being scammed.  There is no company that can “file paperwork” to negotiate your debt away. If that was possible you could just file the paperwork yourself!

us student loan debt statistics infographic
US Student Loan Debt Statistics Infographic

You have to pay an upfront fee.  Legitimate student loan debt companies do not charge upfront fees to refinance student loans.  If you are being asked for a fee, move on. In fact, it’s illegal to require money upfront.

 

You are asked to pay a consolidation application fee.  Only Federal programs can consolidate student debt.  Companies that claim to do this for you are simply applying to the Federal Student Aid office on your behalf and charging you a fee to do so.  You can do this yourself at no charge.

 

They are affiliated with the Education Department.  No, they’re not.  Hang up the phone.  You can always validate anyone who claims to be operating on behalf of the Federal Government at the Federal Student Aid website.

Top 4 considerations before refinancing your student loan:

Make sure you can afford it.  Hopefully, you are refinancing to a lower rate but be sure that you will not incur additional hardship with the monthly payments.  Student loan debt companies are typically private and if you run into trouble with payments, they will not be as flexible with you as the Federal Government might be.  Sometimes, refinancing is not in your best interest. Keep in mind that: 

 

    • Lenders look for a debt to income ratio of less than 50%.  Anything that is 40% or more is a sign of financial stress.  20% is considered a low DTI ratio.
    • Currently, the average interest rate for student loan refinancing with qualifying credit is 3.64% with loan terms ranging from 5 to 20 years.

 

Income-driven repayments.  If you do run into trouble with your payments and are still on a Federal loan, you are eligible for income-driven repayment plans that max out your student loan payment. Income-based repayment or IBR, maxes out your payments to 10 – 15% of your income.  The Revised Pay as you Earn plan (REPAYE) adjusts your payments so that they are never more than 10% of your income. Yes, in some instances it means your interest rate is higher and the lifetime of your loan ends up costing more, but it’s the way to go if you don’t yet have the stable income required to handle a non-Federal loan.

 

How’s your FICO score?  If you have a poor credit score, refinancing is not for you.  Your likely outcome is a decline of credit or a higher interest rate than what you are paying now.  If your FICO score is below 650, wait to apply for a refinancing loan when you reach 650. Even better, wait until you reach 670.

 

Federal loan forgiveness.  Don’t refinance if you are working towards Federal loan forgiveness.  Teacher Loan Forgiveness and Public Service Loan Forgiveness (PSLF) programs do not apply to privately held loans.

Student Loan Alternatives

graduate being hugged by parents

For some graduates strapped with debt, a viable alternative may be to request a loan from a family member. 

 

Family members can be even better options that traditional student loan refinancing options as credit checks aren’t needed, collateral is rarely required and loan interest payment and terms can be the most flexible.

 

Learn how to request a loan from a family member and transact a legal document.

Additional Loan Resources