Illinois pioneers crackdown on scams targeting student loan debt

There is no 'Obama Forgiveness Program,' and some of the services that debt settlement companies sell are available for free. Illinois is taking to court two firms that target people struggling under student debt.

Illinois Attorney General Lisa Madigan took aim Monday at the debt settlement industry – long a hotbed of scams – with lawsuits against two companies that target student-loan borrowers.

The lawsuits against First American Tax Defense LLC, based in Chicago, and Broadsword Student Advantage LLC, based in Texas, are the first of their kind in the nation. Consumer-protection experts say that debt-settlement scams – often promising mortgage or credit-card debt relief – have been a problem for some time, and that their current focus on student borrowers is not surprising, given the way student-loan debt has skyrocketed.

"Student loan debt is now bigger than credit-card debt. With student loan debt being so big and with consumers being more careful with credit cards, last dollar scammers are taking advantage of people looking to clear their name," says Ed Mierzwinski, the consumer program director at U.S. PIRG, a nonprofit that advocates for consumers. "There is this population of vulnerable consumers, many of them young."

Student-loan debt has grown to nearly $1.2 trillion, and affects nearly 40 million Americans – making it an appealing target for scam artists, say experts. The Consumer Financial Protection Bureau (CFPB) estimates that nearly 7 million student-loan borrowers are now in default on more than $100 billion in debt.

In the lawsuits, Attorney General Madigan alleges that the two companies are in violation of several consumer-protection statutes and use fraudulent means to lure borrowers into using their services and paying heavy up-front fees. They would promise to reduce or eliminate student-loan debt, the lawsuits allege, charging people for bogus services and promising assistance, for example, in enrolling in the "Obama Forgiveness Program" – which does not exist – or for government services that anyone can use for free.

Broadsword, for instance, used radio and Internet ads to promise "free" information that could help "anyone with $10,000 or more in federal student loan debt potentially cut their payments in half, reduce their interest rate, or consolidate their outstanding loan." It told teachers, nurses, police, firefighters, social workers, and government employees that they could have their entire student loan forgiven.

In actuality, the lawsuit alleges, Broadsword then persuaded borrowers who called to pay them an upfront fee of $499 and a recurring monthly fee of $49.99, without divulging that the monthly fee actually went to a separate company that offers financial-planning services. The debt-relief programs Broadsword advertises – eligibility for which depend on multiple factors beyond just someone's profession – are administered by the US Department of Education, and can be accessed by consumers for free.

“These companies illegally charge fees for services that student loan borrowers can obtain themselves through government programs at no cost,” Madigan said in a statement. “My office will be aggressive in cracking down on scam operations that prey on student loan borrowers for profit.”

Last year, the CFPB issued a consumer advisory about debt-relief companies, advising borrowers about federal debt-relief programs and income-based repayment plans that are available for free, and telling them that "debt relief companies do not have the ability to negotiate with your creditors in order to obtain a 'special deal' under these federal student loan programs."

“Some of these troubling reports from borrowers remind us of the worst practices that emerged in the wake of the meltdown of the mortgage market," said CFPB Student Loan Ombudsman Rohit Chopra in an e-mail. "In both cases, sloppy servicing spawns scams. Consumers need to receive clear and accurate information about their repayment options from their servicer.”

Madigan's case is an important one, says Mr. Mierzwinski, given the power of her office, the size of the state, and the fact that she's collaborating with federal agencies like the Federal Trade Commission.

Trying to end the debt-relief scams is "like a game of whack-a-mole," says Mierzwinski. "But it's sending the message that consumer cops are on the beat and that’s an important message to be out there.... It's unfortunate that whenever people are financially vulnerable there will be last-dollar scam artists. I’m hoping this lawsuit sends a strong message, but I can’t promise it’s going to end" the practice.