Illinois Files Suits Against Debt Settlement Companies That Allegedly Scammed Student Loan Borrowers

We already know that some debt settlement programs provide little relief for debtors, and consumers who contributed to the $1.2 trillion student loan debt tab appear to be the top target for these companies. Today, the Illinois Attorney General announced lawsuits against a pair of debt-settlement companies that targeted, and allegedly misled, student loan borrowers.

According to a news release from Illinois Attorney General Lisa Madigan’s office, the companies allegedly exploit people struggling to repay their student loan debts.

The two lawsuits contends that Texas-based Broadsword Student Advantage [PDF] and Chicago-based First American Tax Defense [PDF] lured borrowers into paying hundreds of dollars upfront by misleading them about those fees and at times claimed to be affiliated with federal relief programs.

Madigan alleges the companies sought to scam vulnerable people into paying as much as $1,200 upfront for bogus services, including assistance enrolling in a fake forgiveness program or for government services that are already free of charge.

The New York Times DealBook reports that Illinois became the first state to bring legal action against debt settlement companies in connection with their shady student loan practices.

β€œIt’s just, unfortunately, the latest scam on the largest group of people who are struggling with the most debt,” Madigan told the Times.

The companies were able to attract consumers for their services by aggressively courting borrowers who can be vulnerable during lean economic times, such as teachers and police officers. Madigan says the sheer volume of advertisements for the companies first alarmed her.

Advertisements for the companies promised expertise and false affiliation with the U.S. Department of Education to consolidate or forgive consumers’ loans. The companies offered to cut student loan payments in half or eliminate them entirely, and specifically offer public service employees a loan debt forgiveness program for which the companies could not qualify them.

According to the suit, First American offered the so-called Obama Forgiveness Program, that was advertised as recently being approved by Congress. However, no such program exists within the Education Department.

The company also pressed borrowers to make upfront payments by phone, a violation of state law that prohibits debt settlement companies from doing go.

Still, the program was enough to entice a number of borrowers to call First American, as was the case for a Peoria, IL, man.

The man borrowed $10,000 to earn his paralegal certificate, but was having trouble paying back the money. He tells the Times that he paid $175 by phone to First American after he was told it had ties to the Education Department.

Soon after making the payment, he discovered there was no affiliation between First American and the Education Department. In this case, he was able to call his bank and cancel the payment.

While the recent action in Illinois may be a first of its kind, the issues surrounding debt settlement and collection practices are nothing new.

The Federal Trade Commission has received hundreds of thousands of complaints from consumers regarding abusive practices. The Commission, along with the Consumer Financial Protection Bureau, have brought their own actions against several sometimes predatory settlement and collection companies.

Still, the lure to debt settlement companies is a growing concern for regulators, as an estimated seven million Americans have already defaulted on more than $100 billion in student loans.

Companies That Offer Help With Student Loans Are Often Predatory, Officials Say [The New York Times]

Madigan Files Lawsuit Over New Student Loan Debt Scams [Illinois Attorney General Lisa Madigan]