Approximately five million college students leave school with student debt each year. With the conclusion of the six-month grace period, students who graduated last spring would have probably started receiving their first bills for repayment.
Despite the widespread attention that student loans get, many college students often have little or no knowledge of their loan balances or about the cost of attending college. This lack of awareness could come back to haunt them subsequently.
College Students Possess Little Knowledge of the Cost of College and their Student Loans
Last month, the Brookings Institution published a new report that analyzed data from two sources that linked student survey responses to administrative records on costs and borrowing. The authors of the report, Elizabeth Akers and Matthew Chingos, found that a majority of undergraduate students did not understand the costs they are paying for college. In addition, they found that these students often did not possess any understanding of the volume of debt they were taking on.
The report established that:
- About 48 percent of the respondents were unable to correctly identify the amount they paid for their first year of college (within a range of $5,000)
- Nearly 25 percent of the respondents underestimated the amount they paid; 14 percent overestimated the amount they paid, while the remaining had no idea of the amount they paid for their first year of college
- Based on nationally representative data, about half of all first-year students in the US underestimated the amount of student debt they had, while nearly 17 percent overestimated the amount of student debt they had
- Among all first-year students with federal loans:
- Around 28 percent of the respondents said that they did not have federal debt
- About 14 percent of the respondents said that they didn’t have any student debt at all
The report highlights the importance that understanding their loan debts holds for students. Armed with this knowledge, students would be able to plan for their future appropriately. They would be able to take several critical decisions including:
- The fields they want to major in
- The number of credits they would need to take each semester
- The amount of time they would need to work while still in school and,
- The kinds of jobs they would need to pursue after graduation
The Mistakes that Student Loan Borrowers Typically Commit Because of their Low Levels of Financial Awareness
Naturally, if student loan borrowers continue to exhibit low levels of awareness about their levels of borrowing, they could tend to panic when their first loan payments become due. For many of these borrowers, these loan payments could impose more than just a financial burden. Some borrowers could find their debts imposing an emotional burden on them as well.
Some of the most common mistakes that students make when they take student loans include:
- Taking higher amounts of student loans for attending prestigious private schools when public in-state institutions and community colleges present more affordable alternatives
- Ignoring or failing to read the terms of the student loan documents
- Delaying repayments especially on unsubsidized student loans
- Paying little (or no) attention to account balances and statement activities and,
- Falling prey to various debt relief companies who charge exorbitant fees upfront for accessing government programs that enable borrowers to participate without having to pay anything
Student Loan Consolidation Companies – Constantly On the Lookout for Borrowers Requiring Loan Debt Assistance
Higher education often lays the foundation for a good career. However, it is certainly not cheap or affordable for the vast majority of college students. Many students need to consider taking out student loans for paying for college. Everything works perfectly as long as they make their payments on time. However, it is when things go awry that many of these students fall prey to various unscrupulous student loan consolidation companies.
Not all such companies are alike. Some companies legitimately help students with their loans. These companies generally ask students to pay the fee in three to five instalments, including paying the first instalment upfront. However, some unscrupulous entities could make promises that they usually do not keep.
Robert Farrington writes that these student loan consolidation companies advertise aggressively for targeting borrowers. On finding a borrower struggling to repay the student loan, these companies typically enquire about the individual’s loan balance. Thereafter, they promise to provide the borrower with various relief measures such as:
- Reducing the borrower’s payments
- Obtaining forgiveness or,
- Saving the borrower from having to repay the entire loan.
In reality though, Farrington writes, many of these companies often do nothing more than:
- Provide basic loan counseling services
- File the paperwork for the borrower and,
- Collect a fee
The borrower will usually not realize that they can handle these activities themselves.
For example, Farrington cites the Advanced Fee Scam. Here, the company promises to deliver a lower interest rate or loan forgiveness. However, to avail this, the borrower typically needs to pay a fees of $350 – $700 (or more) upfront. On paying the fee, the company disappears without delivering on its commitments.
Government Initiates Action Against Two Student Loan Assistance Companies
Recently, the Consumer Financial Protection Bureau (CFPB) took action against Student Loan Process.US and College Education Services. These student loan assistance companies sold programs to consumers claiming to provide great benefits to borrowers having student loans.
College Education Services, based in Tampa, Florida, advertised debt relief services to student loan borrowers with loans in default. They operated websites like CollegeDefaultedStudentLoan.com and HelpStudentLoanDefault.com. After earning millions of dollars in advance fees from several consumers, the company wound up in February 2013. The CFPB found that the company was:
- Charging illegal advance fees ranging from $195 to $2,500 and requiring that consumers pay all (or a substantial portion) of the fees upfront
- Failing to fulfill its guarantee of giving consumers the facility of lower monthly payments for repaying loans and,
- Making false claims of providing quick relief from default or garnishment to its consumers
Similarly, Student Loan Processing.US, headquartered in Laguna Nigel, California, is a fictitious business name of Irvine Web Works Inc. The company operated websites like StudentLoanProcessing.us, StudentLoanProcessing.org and slplus.org. The company claimed to provide services for advising and assisting borrowers applying for Department of Education federal student loan repayment programs. The CFPB found that the company was:
- Making false claims about being a consultation service provider that had an affiliation with the Department of Education
- Charging consumers with illegal advance fees ranging from one percent of the consumer’s federal student loan balance or $250, whichever was higher and,
- Deceiving borrowers about the costs and terms of the services it provided e.g. it advised consumers qualifying for zero payments to pay $39 a month, without specifying that the amount was a fee levied by the company itself
Based on these observations, the CFPB took actions under the Dodd-Frank Wall Street Reform and Consumer Protection Act. It asked a federal district court to pass a consent order that would permanently ban College Education Services from engaging in any debt relief businesses. In addition, the CFPB is seeking restitution for consumers harmed by Student Loan Processing.US. The CFPB is also imposing a civil money penalty against the company.
A Little Knowledge Could Be Beneficial to Escape from Unscrupulous Companies and Debt Traps
Financial literacy is necessary in today’s world. This is especially the case when you’re taking out loans or making investments. Therefore, student loan borrowers must avoid falling prey to unscrupulous debt relief companies. They must be aware of their loan amounts, the terms of the loan and the repayment schedule. In addition, they must always be in touch with their loan servicers, who will be able to offer them the best guidance possible.
Several debt consolidation or debt relief companies claim to offer various kinds of debt relief services. However, the CFPB reiterates that these companies cannot offer high-quality student loan servicing. In addition, these companies do not possess the skills to negotiate with creditors for securing “special deals under the federal student loan programs. By signing up with these companies, many unsuspecting and vulnerable consumers could end up paying thousands of dollars. That too, without obtaining the relief they expected to on their student loans.