Student Loan Consolidation

July 16, 2014 23:11 by Consumer Ed

Dear Consumer Ed: 

My son just graduated from college and now owes $25,000 in student loans.  He has learned of a company that is offering to negotiate a lower interest rate and consolidate the loans.  How does he know this isn’t a scam?

Consumer Ed says: 

Now that your son is out of college, there are many options for loan consolidation and repayment plans.  However, you didn’t say whether his loans were federal or private student loans.  If your son has a Direct Subsidized Loan, Direct Unsubsidized Loan, or any other federal student loan, he should look into the Direct Consolidation Loan program offered by the federal government.  This program allows your son to combine his federal loans into one payment with a fixed interest rate, and offers several repayment plans.  If someone is helping him with this type of consolidation loan, he should never pay an up-front fee; any fees are deducted from the disbursement check.

If your son’s loans are private loans or do not qualify for the Direct Consolidation Loan program, he should look into a private company that offers student loan consolidation.  Scams involving student loan debt relief have increased in recent years, but asking a few questions will help your son avoid being a victim of one of these scams.  For example:

  • Is the private company attempting to pass itself off as a government agency? Some private lenders use government logos or markings to trick people into thinking they are associated with a governmental agency.  The Department of Education does not advertise or solicit students to borrow money.
  • Is the company charging fees for services you could access for free? Contact the current loan provider first to determine if there are benefits such as forbearance, deferment, or repayment modification that would help your son’s situation before turning to an outside provider.
  • Is the company charging high fees or not disclosing fees? Get a clear answer in writing from the company as to what fees are paid initially and whether there is a monthly fee.  If there is a monthly fee, find out what ongoing services are provided to justify the fee.
  • Is the representative trying to help improve your son’s situation or just selling a particular product? Consultation should include a discussion of all available resources, not just a particular loan consolidation program.
  • Is the representative using high pressure sales tactics? Many companies will resort to high pressure tactics rather than counseling and assistance.  A legitimate provider will understand that your son is making an important decision and should give him time to consider all options before choosing a provider or program.
  • Does the company require the borrower to provide a power of attorney? This is significant and should only be given away when absolutely necessary, and only to a company you’ve researched (and trust).
  • Does the company require the borrower to provide a PIN number for the National Student Loan Data System (NSLDS)?  The PIN number for NSLDS should not be given out over the phone, and should only be provided to a trusted organization.


The most important way your son can protect himself is to learn as much as possible about the industry and the particular lender.  Shop around for other companies offering similar services, comparing fees and loan terms before committing to a particular service.  Research its reputation before giving the company any sensitive information.  In addition to a simple Google search, also check with the local Better Business Bureau (www.bbb.org) to see if the company has had multiple complaints, or if the service is a known scam. 

Finally, borrowers should trust their instincts.  If you don’t feel comfortable with the company you’re working with, look for a different organization that provides comparable services.  This is an important decision whose effect will last for several years, and could mean a difference of thousands of dollars over the life of the loan.  As with school, do your homework!  Get all of the information before making a decision about a lender.

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Will co-signing a loan for my daughter affect my credit?

February 22, 2013 18:18 by Consumer Ed

Dear Consumer Ed:

My daughter wants me to co-sign a loan for a car. If she is late on a payment, will this affect my credit, as well as hers?

Consumer Ed says:

Yes, when you co-sign on a loan, of any kind, both you and the borrower put your credit scores at risk.  If your daughter is late or misses a payment, this fact will be reflected on your credit reports and may negatively affect your credit ratings.  Any late or missed payment will affect your daughter’s creditworthiness as well.
   
There are a number of other responsibilities and risks that you might want to consider before you agree to this co-sign arrangement.  First, you need to understand that cosigning a loan is the same as guaranteeing a debt.  This means that if your daughter does not pay her own debt, you will then have to make the payments for her.  Second, in most states, including Georgia, if the borrower misses a payment, the lender can immediately collect from you as the cosigner.  Therefore, you should carefully evaluate your own finances and only co-sign on the loan if you can afford to pay off the loan plus any potential late fees or collection costs associated with the account.  
   
It is very common for parents to cosign on a child’s loan.  Assuming your daughter pays at least the minimum due every month, this arrangement will help her establish or re-establish good credit.  As her parent, you are better equipped to evaluate whether your daughter is financially responsible and if the terms of the loan are an economically feasible undertaking for her. 

If you decide to cosign on her loan, you should then take appropriate steps to protect yourself and your credit as much as possible.  One way to do this is to try to limit the terms of your obligation.  For example, you can request a contract that states, “The cosigner will be responsible only for the principal balance on this loan at the time of default.”  The lender is not required to consent to your request, but may if asked. You could also ask the lender to agree, in writing, to notify you in the event you daughter ever misses a payment, prior to effecting collection.  Early notification will help you prevent any potential problem from escalating to the point where you would be asked to repay all at once the entire amount owed.  Finally, get copies of all of the important documents involved in the transaction from either the lender or the borrower—the loan contract, Truth-in-Lending Disclosure Statement, and warranty.

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Can a mortgage company ask your neighbors about you if your payment is late?

February 8, 2013 00:52 by Consumer Ed

Dear Consumer Ed: 

Can a mortgage company call your neighbors when you are late on your payment and ask questions about you?      

Consumer Ed says: 

It depends on what you mean by “mortgage company”—whether that company that is your mortgage lender, your loan servicer, or both.  Your mortgage lender is the company that actually loaned you the money to purchase your home; your loan servicer is the company that handles the day-to-day aspects of your loans following the original disbursement.  Your mortgage lender and loan servicer can be the same company.  If you do not know who your loan servicer is you can check this on your monthly billing statement. Or you can call the MERS Servicer Identification System at 888-679-6377, or visit the MERS website at www.mersinc.org/information-for-homeowners/my-mortgage-info.

If your mortgage company is your loan servicer, but not your mortgage lender, these phone calls to your neighbors are regulated by the Fair Debt Collection Practices Act (“FDCPA”).   Under the FDCPA, it is legal for a third-party debt collector (such as a loan servicer) to call your neighbors, provided the content of the conversation is limited to three inquiries—your home address, your home phone number, and where you work.  All other inquiries are illegal.  It is also illegal for a third-party loan servicer, in making such inquiries, to disclose the fact that you are late on your payments or any other confidential information.

If your mortgage company is both your loan servicer and your mortgage lender, the restrictions set out in the FDCPA will not apply.  This is because technically the mortgage company is your creditor, rather than a “third-party” debt collector. 

However, there are other regulations recently put into place by the Consumer Financial Protection Bureau (“CFPB”), the federal agency charged with oversight of all financial institutions, which apply to communications between covered financial entities and third parties.  Under the new CFPB regulations tighter rules will apply. Thus, regardless of whether the company was your mortgage lender or your loan servicer, if the company and the communication it had with your neighbor falls within CFPB regulations, then the company is required to give you notice and an opportunity to opt-out of its third-party disclosure procedures before releasing information about you to your neighbors or other unaffiliated third parties.   

You can learn more about these new federal regulations by visiting the CFPB’s web site at www.consumerfinance.gov/regulations.  If you believe your mortgage company and/or loan servicing company have disclosed protected information about you in a way that violates the law, you can to file a complaint with the CFPB at https://help.consumerfinance.gov/app/mortgage/ask.

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