Private Student Loans Guru
Private Student Loans Guru

Beware of Loan Scams

By Mark Kantrowitz

If you have to pay money to get money, it's probably a scam.

The most common type of student loan scam is the advance-fee loan scam. This scam promises a consumer access to student loans, refinancing, lower interest rates, lower monthly payments, forgiveness or forms of debt relief, in exchange for an up-front fee. Sometimes the promised loan never materializes. Other times, the borrower gets the loan, but could have obtained the loan on their own for free, without having to pay a fee.

Borrowers who are worried about financing a college education and borrowers who are struggling to repay their student loans are most likely to be victimized by these scams.

Some companies offer to consolidate a borrower's federal student loans, reduce the borrower's monthly federal student loan payments, lower interest rates, or rehabilitate defaulted federal student loans, for a fee. These borrowers are often unaware of their loan options.

There are no fees to obtain a federal consolidation loan or change repayment plans. Borrowers can consolidate their federal student loans, switch into an income-driven repayment plan or an extended repayment plan, or obtain other debt relief services for free at

Other companies charge international students big fees to submit a loan application on their behalf to private student loan programs. International students are not eligible for U.S. federal and state student aid programs, including federal student loans. International students can qualify for a private student loan, however, if they have a creditworthy U.S. citizen or permanent resident cosign the loan. These companies charge the international students a fee to submit the student's information through the lender's web site. Not only do these companies charge advance fees, but they do not provide refunds if the student's loan application is not approved.

Most private student loans do not have any fees. No lenders charge a fee to apply for private student loans. When student loans charge origination and guarantee fees, the fees are deducted from the disbursement checks and are not paid before the loan is disbursed. International students could obtain private student loans for free without having to pay an up-front fee by applying directly on the lender's web site.

Charging an Advance Fee is Illegal

Although there's nothing illegal about charging a fee for a free service, something tax preparers do all the time, these companies cross the line when they charge an up-front fee for their services. Federal and state laws make it illegal for a company to collect advance fees prior to providing debt relief and loan modification services. Also, consolidating federal student loans and switching repayment plans is much less complicated than tax preparation.

Some of these debt relief services have also made false and misleading claims about the nature of their services. Some of these services pose as government agencies or programs by using names and logos that are confusingly similar. Others falsely claim to be affiliated with the government programs. Others advertise fictitious loan forgiveness programs like "Obama Student Loan Forgiveness" to lure in gullible borrowers.