In the student loan space, predatory lending practices are fairly common within the for-profit sector. Such is the case of the now-defunct Corinthian Colleges. The chain drove thousands of students toward risky, expensive loans to finance their degrees, which eventually became worthless after the chain’s collapse in 2015.

But expensive loans aren’t the only type of predatory lending practice in the student loan world. Debt relief and forgiveness scams have also become quite common. We’ll go over these practices, as well as how to spot them and legitimate ways to make your debt more manageable.

Key takeaways

  • Predatory lending is any type of abusive, unfair or deceptive practice employed by lenders to push borrowers into taking high-cost, high-risk credit products.
  • These practices disproportionately affect women and people of color, as these groups experience more difficulty making payments due to the existing gender and racial wealth gap.
  • Predatory lending’s high costs can lead to financial distress and diminished credit, which inevitably impacts borrowers’ quality of life and overall well-being.

Predatory lending statistics

  • In 2017, the Federal Trade Commission (FTC) launched an initiative known as “Operation Game of Loans” to crack down student loan debt relief scams. At the time, scammers had collected over $95 million in illegal fees.
  • Academic Aid Center, Alumni Aid Assistance and Post Grad Aid are some of the 20 companies that illegally collected millions of dollars from student loan borrowers looking to reduce their debt.
  • The FTC sent over $2 million to some 22,800 borrowers who were scammed by the debt relief company Student Debt Doctor in 2022. The lawsuit, filed in late 2017, stated that the company offered borrowers immediate relief and forgiveness from their student loan payments in exchange for an upfront fee.
  • Over the last three years, the Consumer Financial Protection Bureau (CFPB) has received over 31,000 complaints regarding student loan servicing.
  • Sixty-eight percent of the complaints received by the CFPB relate solely to federal student loans.
  • Inaccurate loan information and payment mishandling are the top two issues reported by student loan borrowers, accounting for 25 and 21 percent of all complaints, respectively.
  • Navient, one of the largest student loan services in the country, settled a landmark case in January of 2022 for engaging in predatory lending practices.
  • As part of the settlement, Navient will have to pay $95 million to 350,000 federal student loan borrowers, in addition to canceling roughly $1.7 billion in private loans for some 66,000 borrowers.
  • For-profit schools, including the now-defunct ITT Technical Institute and Corinthian Colleges, generated at least $5 billion in shadow student debt as of 2020.
  • On Dec.12, 2022, the CFPB announced that over 23,000 student loan borrowers will receive restitution checks as a result of a multi-million dollar lawsuit against five debt relief companies, including Certified Document Center and Certified Doc Prep Services.

Red flags for borrowers

Predatory student loans often feature double-digit interest rates of up to 35 percent and origination fees in excess of five percent. This combination can easily turn a modest balance into a six-figure debt, causing borrowers to struggle with repayments for more than a decade after leaving school.

However, student loan borrowers are also plagued by another type of predatory lending practice: debt relief scams. These have become increasingly more popular in the last couple of years, after federal student loan payments were temporarily paused in March of 2020. In fact, a report from RoboKiller found that last year alone, student loan scams accounted for 3.1 percent of all spam calls, with over 2.8 billion calls.

According to the CFPB, these are some ways borrowers can spot these scams:
  • A call for urgency: Scammers will say that the student debt relief or forgiveness program is only available for a limited time, urging borrowers to act immediately.
  • Upfront fees: Scammers will claim that in order to qualify for the student debt relief or student loan forgiveness program, the borrower must pay a large upfront fee.
  • Requesting your Federal Student Aid information: Scammers will ask for the borrower’s FSA ID or password. They do this to change the borrower’s contact information, so that the student loan servicer is unable to contact them to notify them that they’ve fallen behind on payments.
  • Promises to remove legally owed debts: They will tell the borrower that once they pay the upfront fee, their debt will be wiped out immediately.
  • Requesting a power of attorney: Scammers will ask borrowers to sign a power of attorney or third-party authorization so they can act on their behalf. This, in turn, allows them to cut any future communications between borrowers and their servicers, leading to severe financial and credit damages.

Student loan forgiveness scams

Both the FTC and the CFPB have been taking legal action against fraudulent student debt relief companies over the last several years in a concerted effort to bring relief to borrowers. These are some of the most recent ones.

FTC vs. Student Debt Doctor LLC

In late 2017, the FTC filed a lawsuit against student loan debt relief company Student Debt Doctor LLC and its owner, Gary B. White, Jr., for commiting fraud and engaging in deceptive practices. The company tricked student loan borrowers into thinking they could get immediate relief from their monthly payments and get their remaining balances forgiven in exchange for an upfront fee.

The company also told borrowers that their loans would be put in forbearance in the meantime, something that didn’t happen. This resulted in financial losses and increased student loan balances for borrowers while also damaging their credit scores when they fell behind on payments.

White and his company were ultimately banned from the debt relief industry following the resolution of this lawsuit. In June of 2022, the FTC announced that it would be sending over $2 million to more than 22,800 defrauded borrowers.

CFPB vs. Frank Ronald Gebase, Jr.

On June 9, 2022, the CFPB filed a lawsuit against Frank R. Gebase, Jr., owner of the student loan debt relief company Student Aid Institute, to block him and his company from participating in the debt relief industry.

The lawsuit is a continuation of a previous case filed on March 30, 2016, in which Student Aid Institute was ordered by the Bureau to cease all operations, after the company violated multiple federal consumer laws. These included charging upfront fees for providing student debt relief services and making false promises to forgive balances and lower payments.

Gebase also collected billing information from borrowers and withdrew a series of fees without borrowers’ knowledge or consent.

CFPB vs. Assure Direct Services, Certified Document Center and three other student loan debt relief companies

On May 7, 2021, the CFPB won a lawsuit against five student loan debt relief companies.

The lawsuit alleged that, between 2015 and 2017 all five companies engaged in practices that violated the Consumer Financial Protection Act and the Telemarketing Sales Rules. These include charging upfront fees for debt relief services, making consumers believe their interest rates would be reduced after subscribing to their services and that the U.S. Department of Education would become their servicer.

On Dec. 12, 2022, the Bureau announced it would be sending over $19.6 million in checks to some 23,500 defrauded borrowers.

What to do if you encounter a predatory lender

If you’ve been a victim of a student loan scam or predatory lending, there are several steps you can take to protect yourself, including the following:

  • File a complaint with the FTC. You can do this online by visiting the agency’s website or by calling 877-382-4357.
  • File a complaint with your state attorney general.
  • If you’ve given someone your FSA ID and password, change your credentials immediately.
  • Contact your student loan servicer. Servicers often have processes in place to effectively deal with these kinds of situations, making things easier for you.
  • Contact your bank and notify them of the issue, so they can stop any unauthorized payments.

Alternatives for financing

If you’re struggling with your student loan payments, know you have options. If you have federal student loans, you could apply for an income-driven repayment plan, which adjusts your payments based on your income and family size.

If you have private student loans, consider refinancing. Refinancing can lower your monthly bill two ways: either by reducing how much you pay on interest or by extending your repayment term. Although excellent credit and a stable source of income are usually required for this, some lenders are willing to work with you even if you have less-than-stellar credit.

You can also ask your lender about forbearance and deferment options for both private and federal student loans. Both of these temporarily pause payments for a few months at a time, allowing you some flexibility until you get back on your feet.