Student Loan Forgiveness Scams

On a daily basis, student borrowers fall for various kinds of scam in their quest to get rid of the burdens of their loans. This article clearly describes the various kinds of loan forgiveness scam and how to spot them as well as the necessary steps to be taken when scammed

Updated by Martin Paul on 3rd July 2020

Presently, there is over $1.5 trillion in student loan debt. Billions of dollars are being loaned to students each year and their quest for getting student loan forgiveness for these loans has caused a rise in the number of scammers offering enticing services of loan forgiveness which they fail to fulfill but end up stealing more instead.

They sometimes promise to help you get out of debt or default but for a small fee. It always starts with a secret student loan forgiveness program you never heard of or applied for, but you magically and mysteriously qualify for, offers from agents and companies with no website or phone numbers, requesting for down payments and offering loan forgiveness in return. It should be noted that are a number of jobs available to help get your loans forgiven. Having an indept understanding of the various student loan forgiveness jobs out there is crucial to see if your job can get your loans forgiven.

They always sound desperate and convincing in their quest to extort money from student borrowers.

We will be looking at the different scams and tricks used to deceive borrowers and different ways of avoiding being scammed.

Table of contents

How to Spot a Student Loan Forgiveness Scam

Hundreds of private companies tend to lure struggling borrowers and students with promises such as student debt relief when as a matter of fact all they do is a charge for enrollment of loans in free federal programs. Though not all such companies are scams, bad actors are vast and rampant. More than 130 student debt relief companies and entities have a history of activities that give consumers reason to be wary

Some of these entities or companies claim to have a relationship with the Department of Education (third-party companies have no direct relationship with the Department of Education)

Any private firm promising you a set payment or forgiveness should be viewed with scrutiny because no private company can promise forgiveness or guarantee an income-based repayment since these are only offered for the federal student loans. Sometimes they promise immediate loan forgiveness or cancellation or say they will buy off the loan.

Types of Student Loan Forgiveness Scam

Various forms of scams have emerged over the course of time. Rather than charge a direct advanced fee, some companies would offer a second personal loan - which is basically a fee in the format of a loan. Many borrowers who get involved in this sort of practice usually fail to realize they took out a new loan, and there are consequences if you cancel or don't pay (such as interest and collection fees).

1. Advanced Fee Scam

This scam usually involves a lender that convinces you they can get you the "best" interest rate as well as loan terms but at a "small" service fee. The fee can range from 1-5% of the actual loan amount. Sometimes this fee is an up-front flat rate of about $1000.

You don't have to pay money in order to get money. Legitimate student loans, even from private lenders, do not ask or require any upfront fees. If there are any fees, they are usually debited from the disbursement cheque or they are added to the repayment amount which gets amortized over the repayment period.

There may be two common fees that could be paid with the loan, but once again, never upfront.

The federal student loan fee

The Federal student loans usually charge a 1% default fee, but do not charge any origination fees.

The private student loan fee

Most private lenders charge either a disbursement fee or an origination fee, but these are generally negotiable and are distinct from lender to lender.

While working with a third-party agent or company, they might request for an upfront fee. This fee must go into an escrow account (a middle-man or third-party account). In this way, the company only gets paid when they prove they’ve helped you sign up for a program.

2. Loan Consolidation Scam

After graduation, it might be a great idea to consolidate all your small student loans. This is another area that thrives with the scam. The most encountered and common student loan consolidation scam is one whereby a fake company charges a consolidation fee, but sits back and does nothing. This fee is usually called an administrative fee, processing fees or a consolidation fees.

Having a federal student loan does not require the payment of an extra fee for student loan debt consolidation. You can do it yourself for free at the student loan official website.

However, if you have a private student loan, there are a reasonable number of lenders who could refinance your private and federal loans. Refinancing is quite different from consolidation because consolidation involves combining or merging all your small loans into one, while the refinancing involves taking out a whole new separate loan with a new lender who pays off your existing loans.

Learn what is student loan consolidation to avoid scams

3. Law Firm Lawsuit Student Loan Scam

Here a law firm claims to have the legal authority to settle your student loan debts. There are many variations on this kind of scam but ideally, a borrower gets referred by some potential "student aid company" to a law firm. The law firm then promises that they can settle the loan debt for thousands less than you owe.

Sometimes the law firm even asks the borrower to make full student loan payment directly to them, claiming they can negotiate a settlement lender on behalf of the borrower.

However, what generally happens at the end is that this law firm makes no payment to your lender which could result in a default on your student loans. At that point in time, the law firm then claims you can't pay your debts, and try to strike a deal or negotiate a settlement based on that.

What then happens to you, the borrower is that your credit score dwindles even though you already made thousands of dollars in payment to the law firm. A the end of the day, there is no guarantee whether or not you will be able to settle your student loans. And even if you do, this process may take several years, and you'll still have to deal with the settlement in the end.

4. Student Loan Debt Elimination Scam

One key factor never to be forgotten about student loan debt is that it must always be repaid - it can never be eliminated or avoided unless there exists a federally qualifying reason such as death, identity theft, school closure, falsification of documents, or a lifelong permanent disability. Whenever a company promises to get your student loan debt eliminated or forgiven, it is a scam!

Such scams are closely seen among closed-for-profit colleges and universities. Companies sometimes advertise, claiming that they can get your student loans eliminated simply because you attended a certain college or university. This is usually false.

Nowadays there are many student loan forgiveness programs that you can consider. In a situation where your school closed up or is facing lawsuits, you can potentially do what’s called Borrower Defense for Repayment. But while seeking the expertise of a company, ask them specifically what they are doing for you.

5. A salesperson pressures you into signing up

Some companies sell student debt relief services through sales representatives who earn a certain commission based on the number of customers they are able to sign up. Sometimes they instill a sense of urgency, by making statements like, “Sign up now before it’s too late!”

There is no legitimate loan program that can be availed only for a short period of time.

6. You’re asked to share sensitive personal information

Sometimes a company may ask borrowers to provide Federal Student Aid IDs or their Social Security Numbers. These shared data gives the company the ability to sign in to your account and make unwanted decisions on your behalf which could have an adverse effect on your credit score later.

Additionally, some self-acclaimed debt relief companies ask borrowers to sign power of attorney agreements. This would legally allow the businesses to communicate with your loan servicer on your behalf and in your name. You’re not obligated or mandated to sign such documents; as a matter of fact, doing so may cause you to lose access to your student loan account.

7. Adverts on Social Media or Search Engine Ads

Borrowers must view student loan assistance companies who pay to advertise their services with skepticism. This generally means that they’re in the business for profit and nothing more. Since you need not pay to consolidate your federal loans or switch repayment plans, this is a sign that the services they offer could be a scam and a scheme towards misleading you into paying for something that’s supposed to be for free.

Confused about school fee? Learn about student loans

What to do if you have been scammed

1. Contact the credit bureaus

The first step to be taken is a call to the three major credit bureaus - Equifax, Experian, and TransUnion. A possible fraud should be reported so they can put a freeze on your credit. Although all student aid scammers are usually focused on the fees, your personal information might be at risk of misuse if it falls into the wrong hands.

2. Contact your loan servicing company

Once you’ve been scammed, you're expected to get your student loan repayment back on the right track by calling your loan servicing company to set up a repayment plan you can afford.

Quickly get in touch with your lender, narrating to them exactly what happened. Do ensure they change any account passwords and profile information, and discharge any power of attorney paperwork filed on your behalf prior to the incident. You should also try discussing with them directly on the best and suitable steps to be taken in moving forward with your loan repayment.

3. Bank-issued stop payment for the fees 

If an advance fee has been demanded, you can get your money back or avoid losing more by informing your bank or credit card issuer to put a hold on the payment. You should report such transactions as fraudulent, this may prevent you from having to pay for it.

This is where using a credit card favors when compared to a debit card.

4. Protect your FSA ID protection

If your FSA ID has been shared with the company, quickly update your password. You should also get in touch with the Office of the Inspector General. Other options to be considered here involves reporting the company to the Consumer Financial Protection Bureau through their online complaint site at

You can also get in touch with the Federal Trade Commission (FTC) to file a complaint if you believe you are a victim of a student loan aid scam.

Although this might not help you recover your lost funds, it might help to shut down a real scam company.

5. File a complaint with your state attorney general

Some state attorney generals have incited an aggressive approach on student loan repayment assistance scams. You should contact your state attorney general to file a complaint with the specific information.

Why file a complaint?

The attorney general’s office of Washington State since November 2015 has returned over $1.2 million to residents. 

Student debt relief companies have been on the increase because victims of scam fail to lodge their complaints due to the difficulty in filling out the necessary paperwork which could be characterized as time-consuming. It is therefore important to note that you may never get your money back if no complaint is made.

Things you need to know about these scams

A lot of students sometimes doubt and often wonder whether or not student loan forgiveness is legitimate.

It is legitimate but not everyone is eligible.

To be considered for PAYE, IBR, or PSLF, you must maintain payments lower than what they would be under the normal standard 10-year repayment plan.

Let's assume you earn $30,000 each year as a social worker but only have an $80,000 in debt because of your master’s degree. Linking your loan repayment to your yearly income would keep your payments lower over a longer period. This would, in turn, cost you more to repay unless you qualify for loan forgiveness.

Forgiveness takes a long time

It depends on the program being pursued but your student loan will not be forgiven for years. This makes you pay more in interest than on a standard plan

When the time comes for your loan to be forgiven, the remaining balance may not be impressive (maybe very low)

The Internal Revenue Service makes the forgiven student loan to become taxable income unless your debt is forgiven through the PSLF or teacher forgiveness programs. For example, if you manage to have a $50,000 worth of loan forgiven, you may have to pay the federal (and possibly state) taxes on that particular amount.

It’s not always worth it

As stated earlier, you may be paying more on the interest rate if you opt for an IBR plan.

Most student loan forgiveness programs require the borrower to work in public service areas, so you are likely to earn a lower salary than you would in the private sector. You’d also be earning a higher income as a lawyer for a firm which represents name-brand clients than you would as an attorney for the government. 

Legitimate student loan forgiveness programs

Getting loan forgiveness is a difficult process and task that is available only on some specific situations and this only applies to federal loans; forgiveness for a private student loan does not exist. So whenever someone promises to erase your debt with a private lender, it’s most probably a student loan forgiveness scam.

Seeking forgiveness for your federal loans might involve opting for an income-driven repayment (IDR) plan. For these plans, you just have to pay a small percentage from your income toward your student loans.

Public Service Loan Forgiveness Program

Public service loan forgiveness (PSLF) is a legitimate student loan forgiveness programs which offer to forgive the remaining loan balance amount of individuals working in public service jobs.

Public service loan forgiveness has the following features - 

  1. The maximum monthly payment completely depends on your repayment plan.

  2. These loans are forgiven after 10 years of constant payments under an IDR plan while working under any qualifying public service job

  3. The loans eligible for this program are the Direct Subsidized and Unsubsidized Loans, Direct Consolidation Loans and the Grad PLUS Loans.

  4. These loans are forgiven when the borrower has a permanent disability.

  5. The eligible loans for this program are the Direct and Perkins Loan programs

Learn more on Service Loan Forgiveness Programs

Legitimate student loan forgiveness companies

There is no private company who offers loan forgiveness. A private loan can be discharged under the following conditions and situations

1. Bankruptcy

Filing for bankruptcy can cancel some of your debts, such as your credit card balance. In some cases, you may be able to discharge or eliminate your student loan debt. However, getting private loans discharged or forgiven through bankruptcy is much more difficult when compared to other forms of debt.

2. Death and disability discharge

A handful of lenders offer death and disability discharges on private student loans that are modeled after the similar discharge provisions available on federal education loans.

These lenders are - 

  1. Sallie Mae

  2. New York Higher Education Services Corporation

  3. Wells Fargo and Discover

These private lenders have a compassionate review process, where they review borrow requests for financial relief based on a case-by-case basis. 

Frequently Asked Questions

  • 1.Are student loan forgiveness programs legitimate?

    Yes, they are. For instance, Obama student loan forgiveness' programs don't exist. There are legitimate government programs, such as Public Service Loan Forgiveness, that can reduce or eliminate federal student loans after a certain amount of time. However, only some individuals qualify for the programs

  • 2.What qualifies you for student loan forgiveness?

    The Public Service Loan Forgiveness (PSLF) Program forgives the remaining balance on your Direct Loans after you have made 120 (10 years) qualifying payments under a qualifying repayment plan.

  • 3.How many days after missing a student loan payment do your loans go into default?

    If you have federal student loans, at first, you'll be delinquent. Nine months after you miss a student loan payment, your loans will then enter into default status. If you have private loans, there's no “grace period” of delinquency; your loans are immediately in default the day after your payment was due.

  • 4.How do I find out who has my defaulted student loan?

    If you are unsure which agency is servicing your defaulted student loan(s), click here (you must log in if you are not already) or you may call 1-800-621-3115 (TTY: 1-877-825-9923) for an address and telephone number of the collection agency for your defaulted Federal education debt.