Debt Settlement Companies And College Costs Frustrate Students

Kate Patrick Contributor
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We all know it, the monster in the closet that only comes out at night, whispering doubts and haunting us with our worst fears: “What if my interest rates go up? Did I remember to make last month’s payment? How much more are they going to take out of my paycheck next time? I’m going to be eighty by the time all this is paid off.”

It’s the nightmare of student debt. Is there anyone to save struggling students and graduates from the all-consuming black hole of unpaid student loans?

The situation is indeed dire. The New York Times reports that “some Americans, including baby boomers whose savings were devastated by the financial crisis, are still struggling to pay off their student loans well into their 50s. For the debt settlement industry, all this means a tantalizing gold mine of new customers.”

Until now, debt settlement companies have masqueraded as heroes for those desperately struggling to navigate their way through college debt. But it now seems that debt settlement companies are much less heroic than they claim to be. The purpose of a debt settlement company is to lower monthly loan payments, usually for credit card and mortgage holders. Since the dramatic increase of college costs and the rise of student debt, debt settlement companies have sought out those struggling with student loans, supposedly making life easier for recent grads who have an entry-level salary at an entry-level job.

Now Illinois, according to The New York Times, is “bring[ing] legal action against debt settlement companies in connection with their student loan practices, contending in two separate lawsuits that Broadsword Student Advantage and First American Tax Defense duped vulnerable borrowers into paying for help that never arrived.”

More and more borrowers are filing complaints to the Federal Trade Commission (FTC) over the malpractices of debt settlement companies.

“It’s just, unfortunately, the latest scam on the largest group of people who are struggling with the most debt,” Illinois attorney general Lisa Madigan told the Times.

After the 2008 financial crisis, debt settlement companies enjoyed a heyday when millions of borrowers needed relief from hefty mortgage payments. When borrowers asked these companies for help, the companies promised borrowers’ payments would decrease if borrowers sent them their mortgages. Unfortunately, this didn’t bring down payments, but ruined credit scores and loaded borrowers with even more debt.

In the wake of a higher education bubble, students are the new victims. With total costs amounting to $30,000-$40,000 a year, colleges are draining students’ bank accounts dry. Many can barely keep up with loan payments.

AEI’s Resident Scholar and Director of Education Policy Studies Rick Hess believes the bigger problem is the Obama administration’s use of regulation to keep out cheaper options for higher education, forcing students to choose unaffordable colleges and borrow thousands of dollars to attend. Then, when debt settlement companies use students to make a profit, they get demonized.

“It seems that the Obama administration is leading a witch hunt against for-profits without actually doing anything to open up the higher education space, folks who are really trying to offer cheaper, consumer-friendly models,” Hess said in an interview with The Daily Caller.

There’s a stigma, Hess said, that you have to get a college degree, and that’s driving up the price of going to college, causing students to seek out loans.

“President Obama and Secretary Duncan say it’s a problem that we don’t have enough people finishing their degree,” Hess told TheDC. “When they enroll everybody, they’re going to see a higher level of dropouts. For-profits are serving students what colleges aren’t serving, in many cases. We’ve seen an increase in college costs and we’ve made it hard for cheaper options to emerge.”

Right now, students can only hope that legal action will alleviate some of their grievances. Madigan’s lawsuit, for example, will bring attention to the malpractices of debt settlement companies.

“In July, the Consumer Financial Protection Bureau, which has taken enforcement actions against a number of debt settlement companies, issued a specific warning about companies that claim to help with student loan debt,” the Times reported.

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Kate Patrick