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In recent trends, the rate of student loan default has been increasing, and there is a negative repercussion to this trend that may not be too obvious. Long story short, there has been a startling increase in the number of scams as default rates rise.
Something like this has been seen before. When the housing market began to crash, a startling number of people entered default on their mortgages. Consequently, people began falling for scam offers on mortgages that promised some special solution to the woes of defaulting.
Today with the trend of student loan default, the same thing is starting to happen again. Many people do not understand how student loans, interest rates, and other common aspects of the industry work which includes loan default. For those who do not know, defaulting on a loanrequires the borrower to be at least 90 days late on a payment.
In addition to a lack of knowledge on student loan basics, there is an equally vacant base of knowledge on government programs meant to aid borrowers entering default or delinquency. Many people do not understand the basics of these programs such as the Pay As You Earn (PAYE) program or the income-based repayment plan.
Many scams formulate offers that mirror these government programs in order to dupe borrowers, but there is one key difference between a scam and a viable program: an application fee.
Scams are trying to make money. Government programs are trying to help you save money and make your payments on time. If an offer requires you to pay an upfront fee for its “services,” then it is most certainly a scam. Government programs require no application fee. These scams bank on naivety and ignorance in order to make money, so it is up to the borrower to educate himself or herself to combat these scams.
There is a general outline to follow when faced with default on student loans. It is important for people to understand what their options are; for instance, there are multiple options to keep in mind such as student loan refinancing or student loan consolidation. Student loan refinancing from a private lender could help you avoid default, but keep in mind that you’ll need to qualify for a refinance loan. A federal consolidation loan is more readily available, and can still help you avoid default.
There are programs offered by the government such as the income-driven repayment (IDR) programs which were mentioned earlier. These are all good options for someone who might enter default; they are designed to keep payments low and loans out of default.
Getting caught by a scam is definitely one of the worst scenarios for someone in student loan default. It will only put the borrower into a deeper hole than before.
Author: Jeff Gitlen
Jeff Gitlen writes about a wide range of finance topics including everything from student loans to credit cards to small business financing. Jeff's work has been featured on a number of sites including Bloomberg, CNBC, Forbes, Market Watch, and more.