Several debt settlement companies have been running advertisements that offer to consolidate a borrower’s student loans, reduce loan payments and rehabilitate defaulted student loans, for a fee. These advertisements appeal to borrowers who are struggling to repay their student loans but who are unaware of their repayment options.
Borrowers can consolidate their federal student loans for free at StudentLoans.gov. They can also obtain flexible repayment plans, such as extended repayment and income-based repayment, without needing to pay a fee. There are also free options for rehabilitating defaulted federal student loans.
So, in effect, these companies are charging a fee for services that borrowers could obtain on their own, for free.
There is no law against charging a fee for a free service. For example, tax preparers charge fees to help people file their income tax returns. But, some of the companies that help borrowers consolidate their student loans may have made false and misleading claims about the services they provide or falsely suggested that they are affiliated with the U.S. Department of Education’s direct loan program.
Some borrowers may be unaware that they can consolidate their federal student loans on their own, for free. When the Health Care and Education Reconciliation Act of 2010 ended the Federal Family Education Loan (FFEL) program, it ended the ability of banks and other financial institutions to make new federal education loans, including federal consolidation loans. Since July 1, 2010, all new federal consolidation loans have been made through the federal direct loan program.
When borrowers of FFEL loans ask their lenders about consolidation loans, the lenders respond that they no longer make consolidation loans. Some lenders tell borrowers that they can consolidate through the direct loan program. But, others do not, because then the lender will lose the loans, including the future interest payments on the loans. This may lead some borrowers to believe that consolidation is no longer available.
There are several possible solutions that address the lack of awareness of student loan repayment options:
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