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Scammers target student debt relief as loan defaults surge to $90 billion

Students earning degrees at Pasadena City College participate in the graduation ceremony
Students earning degrees at Pasadena City College participate in the graduation ceremony. Photo: Robyn Beck/AFP/Getty Images

Companies are increasingly targeting student debt borrowers by selling scams that promise to help reduce or forgive loans, the Wall Street Journal reports.

Why it matters: A record $89.2 billion worth of student loans had been defaulted on at the end of June, while 11% of the $1.48 trillion in total outstanding loans was "at least 90 days behind on repayments," according to New York Federal Reserve data. The companies identified by the WSJ — some of which are legally allowed to operate — have been flagged by regulators that warn the services they offer are usually free. Other companies are fraudulent, regulators say.

  • "Many of the [Federal Trade Commission] cases allege that the companies charged upfront fees for debt relief, which is illegal, or engaged in other prohibited practices such as masquerading as being government-approved, or faking information on applications for federal relief," WSJ's Jean Eaglesham, Michael Tobin and Coulter Jones write.

The big picture: The FTC and the Consumer Financial Protection Bureau are responsible for oversight of these companies. Problems have cropped up where the firms offering these services use several names.

  • Identical testimonials appeared across 26 websites of supposedly different companies, which gave positive reviews for debt-relief services, WSJ found.
  • The FTC "filed nine civil cases against alleged student-loan debt-relief scams since 2017, involving a total of 77 different companies," per WSJ.
  • One company the Journal highlighted was Financial Preparation Services, which submitted claims for federal relief with fake information, a former employee said. Federal regulators are demanding more information about FPS and several other companies, according to a bankruptcy court filing.

Between the lines: Federal relief programs do exist and offer a reduction or forgiveness of debts for those who qualify, such as public-service workers or people with low incomes. Last week, President Trump signed an executive order that will cancel student loan debt for permanently disabled U.S. military veterans.