A federal-state crackdown on student loan scams drew strong praise Monday from borrowers and their advocates — and reignited criticism of the U.S. Department of Education for doing too little.
Prosecutors are acting against three dozen companies that they say swindle borrowers by charging fees on false promises of debt relief. Until now, state attorneys general have operated piecemeal, shutting down organizations in individual states while the companies continue gouging student loan holders elsewhere.
“These actions are sorely needed,” says Suzanne Martindale, senior attorney at Consumers Union, a consumer advocacy organization. But, she says, “we still have a really complex and broken system. This is the time for regulators who have any piece of the jurisdiction here to step up and stand up for student borrowers.”
Scams have thrived
Consumer advocates and aggrieved borrowers spoke after Friday’s action by the Federal Trade Commission, which announced the first coordinated federal-state initiative targeting the student loan scams.
A NerdWallet investigation four months ago found that student debt relief schemes were thriving due to the lack of a systematic state-federal approach to policing the industry. With the federal government acting against just a handful of companies nationwide, states were thrust to the front line of enforcement — with limited effect — NerdWallet reported.
The new crackdown includes lawsuits against companies that promise debt relief or forgiveness, but pocket borrowers’ payments and do little, if anything, in return. Borrowers often know nothing of the scams until it is too late and the government garnishes their wages and seizes tax returns.
More action demanded
While advocates and members of Congress say enforcement helps, they fault the Department of Education for doing too little to spot scams and address what they see as a root cause. They say the agency and its contracted loan servicing companies expose borrowers to fraud by failing to steer them toward appropriate repayment plans.
“It’s encouraging to see such a strong action by the Federal Trade Commission and the 11 states attorneys general,” says Persis Yu, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project. But, she said, “the Department of Education needs to be doing a much better job at ensuring that borrowers are able to access their rights through their servicers.”
Sen. Elizabeth Warren, D-Mass., is also pushing the Department of Education and its servicers to help thwart outfits that victimize some of the 42 million Americans who’ve borrowed a total of more than $1.4 trillion. Warren and nine other senators wrote to Education Secretary Betsy DeVos on Sept. 8, saying “the prevalence of debt relief scams can be traced directly to the failure of the department to ensure effective and streamlined student loan servicing.”
The senators called on the department to push loan servicers to track scams, alert potential victims and tip off law enforcement officials. They asked the agency to form a task force to coordinate federal agencies, and to notify search-engine and social-media companies of potentially fraudulent advertisers.
Using tech to their advantage
Companies use search engines to reel in borrowers such as Jackie Hampe, 55, of Iowa, who owes about $21,000 in loans from her son’s education at a motorcycle mechanics school. Hampe says she Googled “Great Lakes” in September, seeking a phone number for Great Lakes Higher Education Corp., her federal student loan servicing company.
When she dialed a number that popped up high in the search results, Hampe says she reached a company called Student Debt Doctor LLC. The company told her that for $200 it could eliminate her monthly payment, Hampe says.
Student Debt Doctor is one of 36 companies facing legal actions in the federal-state sweep. The Fort Lauderdale, Florida, company and its owner, Gary Brent White Jr., collected at least $7 million from struggling borrowers, charging illegal upfront fees of $750 or more, according to the FTC.
A federal judge issued a temporary restraining order Oct. 3, effectively closing the company and placing it in receivership pending further investigation. Justin Infurna, White’s attorney, said Monday that he could not comment on an ongoing federal investigation.
Watch list grows
Hampe is one of many borrowers who shared their stories with NerdWallet after the personal finance website’s stories first published in June.
On Monday, NerdWallet added more than a dozen companies targeted by the sweep to its Student Loan Watch List, whose web entries warn consumers of businesses to avoid.
In Washington state, officials have led the nation in shutting down student loan rackets. The state filed 13 more lawsuits in conjunction with the latest national sweep.
“We’re doing everything we can to stop those that are violating our state law,” says Shannon Smith, Washington state consumer protection division chief.
Washington is cracking down on companies for violating state debt adjustment laws, accusing them of charging illegal upfront fees and collecting payments above lawful limits. Most of the companies sued by Washington Attorney General Bob Ferguson are out-of-state businesses that target borrowers in the state.
Swindlers persist, drawn by easy money. “It’s the motivation of a fairly quick profit at the expense of these student borrowers,” Smith says.
Borrowers who say they’ve been scammed welcome the federal-state sweep.
“It’s really awesome that the FTC is getting involved and that some of these companies are going to be held accountable,” says borrower Tara McFarland, who adds that she almost fell for a scheme that would have hijacked her $100,000 student loan serviced by Navient.
“We’re already in these desperate situations with student loan debt,” she says, “and they’re making the process even harder.”
NerdWallet writers Brad Wolverton and Alex Richards contributed to this story.
More from NerdWallet