NerdWallet: Feds argue as ‘debt relief’ companies prey on students

Fraudulent “debt relief” companies are preying on the most vulnerable of the 44 million people with student loans, as federal officials dispute who’s to blame and what to do, a NerdWallet investigation has found.

U.S. enforcement agencies – the Consumer Financial Protection Bureau and the Federal Trade Commission – in recent years have closed only seven companies that lured consumers with rosy promises to reduce or forgive student loan debt.

But more than 130 student loan debt relief businesses operating during the period had records of questionable or illegal behavior, according to a NerdWallet review of public records. The search of state and federal documents nationwide identified companies hit by lawsuits, court actions or negative Better Business Bureau ratings – or had owners who couldn’t manage their own debts.

Many of the businesses continue fleecing borrowers, NerdWallet found. Some charge illegal upfront fees and monthly dues for debt consolidation, then hijack debtors’ accounts and let payments lapse, leading to garnished wages, seized tax refunds and ruined credit.

CFPB officials defend their scant enforcement record. Consumer advocates largely agree with them, saying that playing Whac-A-Mole with debt-relief scammers is a costly, fruitless game.

State prosecutors – including attorneys general in Washington and Illinois – are trying to fill the void, closing nearly three dozen companies in individual states, but many of those remain free to operate in the other 49.

The consumer agency and advocates fault the U.S. Education Department for enabling what they identify as the root cause of the scams – bad practices of loan-servicing companies such as Navient. Those loan servicers are failing to help debtors struggling to make their payments, driving them into the arms of dishonest companies, critics say.

The CFPB is suing Navient Corp., accusing the servicer of profiting by leaving borrowers in expensive payment plans, an allegation the company denies. Consumer advocates say that if the Education Department made loan-servicing companies steer people into affordable payment plans, desperate borrowers wouldn’t fall for debt relief scams.

“The fact that these ‘debt relief’ companies continue to exist and operate is just a travesty,” said Persis Yu, who runs a program to help student loan borrowers at the National Consumer Law Center. “The Department of Education needs to get servicing under control, because improving servicing is one very important way to turn off the spigot that lets the scams operate.”

At $1.4 trillion, student loans today trail only home mortgages as a source of personal debt, exceeding credit cards and auto borrowing. One of five U.S. households has a student loan and for many, the burden is onerous.

Millions of borrowers have fallen into delinquency or default, unable to make monthly payments that are often higher than lenders approve for mortgages.

Desperate, they turn to phony debt relief companies that hype promises of lower payments or loan forgiveness.

“They try to take advantage of desperation,” said Janna Champagne, a chronically ill Oregon nurse who owed more than $150,000. She paid for help from a company called Debt Relief Pros Inc., but said “they made all kinds of promises they couldn’t keep.”

At best, companies simply collect customers’ money and enroll borrowers in federal programs available for free on government websites. The worst offenders gain power of attorney, IDs and passwords to access loan accounts – and let them lapse.

As a result, money that should be flowing to U.S. taxpayers in the form of loan payments instead is siphoned away by illicit operations.

A team of NerdWallet researchers and reporters examined the student debt relief industry, conducting a federal and 50-state review of court records and other public documents.

The records show that a handful of aggressive attorneys general – notably, those in Washington and Illinois – have shut down the largest number of student-debt companies barred from doing business in individual states.

“There’s definitely a Whac-A-Mole problem, which is why the servicer element is so important,” said Lisa Donner, executive director of Americans for Financial Reform.

To help consumers, NerdWallet has launched a first-of-its-kind NerdWallet Student Loan Watch List made up of web pages on more than 130 businesses, warning borrowers to beware.

The company that took Champagne’s money made the list because Oregon banned it from operating any debt relief business in the state. Washington state ordered the company to make refunds to borrowers there.

But across the country, state officials say they’re constricted and outgunned.

“A national solution is the best way to confront this problem,” said Shannon Smith, Washington state consumer protection division chief. Smith’s agency has taken a leading enforcement role nationally with just two attorneys working part time on debt relief scams.

The attorney general’s press secretary in Florida, a hotbed for national call centers hawking student loan relief, said the rackets swamp federal and state agencies.

“Unfortunately, there are more than enough scams to go around the various enforcement agencies,” press aide Kylie Mason said. “We will continue to work together and independently to do whatever we can to shut down these fraudulent schemes as quickly and effectively as possible.