Federal Student Loan Relief Update: Challenges & Potential Scams

Federal Student Loan Relief Update: Challenges & Potential Scams

We’re back with a follow up to our recent blog: Federal Student Loan Relief Program: What You Need to Know.

In that article, we summarized the essential program information known at that time – and cautioned that the program may be challenged in court. Since its publication, there have been lawsuits challenging the program, which may have resulted in some program modifications. Additionally, there is evidence of student debt forgiveness scams that can impact individuals.

Legal challenges to the federal student loan relief program
As anticipated, lawsuits have been filed challenging the program.

One lawsuit filed by the attorney generals of six states accuses President Biden of vastly overstepping his authority by announcing the student debt relief program, which the Congressional Budget Office estimates could cost up to $400 billion over the next three decades. The White House has indicated that the President does have the authority to announce this program under a 2003 law known as the Heroes Act, which gives the Department of Education secretary the power to waive regulations related to student loans during times of war or national emergency. The U.S. remains under the state of emergency declared by President Donald Trump in March 2020 at the beginning of the pandemic.

The existing lawsuits were just filed in late September, and time will tell if these, or other potential lawsuits, will derail the program.

It is interesting that even before these legal challenges, the Department of Education announced that it would no longer forgive the debt for students with federal student loans that are held by private companies.

Important dates and application considerations
The online application for student debt relief is schedule to go live in October. Eligible persons will not be notified by mail, but should sign up for notifications at StudentAid.gov/DebtRelief.

If an application is approved, it is estimated that it will take 4-6 weeks to process cancellations. Therefore, it is suggested that once the online application is available, affected individuals should apply by November 15, 2022, or 4-6 weeks before the final pause on federal student loan payments expires on December 31, 2022.

It is also important to ignore any pitches or enticements to refinance federal student loans right now into private student loans if you think you qualify for the federal student loan forgiveness program. Private student debt is not eligible for federal debt forgiveness.

Beware of Student Loan Debt Forgiveness Scams
According to the Department of Education, 43 million Americans are eligible for student loan relief, and to scammers, that means a big pool of potential victims. Now is the time to be more vigilant.

• They ask for a “processing” fee: There is no cost to participate. Applying for student loan forgiveness programs is free, so if someone contacts you asking for a processing fee, it’s a scam.
• They use urgent wording, like “you need to act immediately”: The Department of Education will never use strong advertising language to tell you to do something right away.
• They make empty promises: If they are promising to have more of your loans forgiven than Federal guidelines allow, it’s a scam.
• They ask for your Bank account information: If you get a call, hang up immediately – never share your personal information, especially over the phone, with someone you don’t know

Beware of Phishing Emails
Scammers may use phishing emails seeking to steal your sensitive personal information in connection with a student loan forgiveness scam. These attempts have gotten much more sophisticated in recent years, and may appear legitimate, using official logos and spoofed domain names. Be sure to independently verify the sender of any email seeking sensitive information. Always log into your student loan servicer website directly instead of clicking on links in an email.

Avoid Scam Ads when Searching for Loan Forgiveness
According to a recent report, 12% of the Google ads that appeared in searches for key terms around student loan forgiveness prior to the President’s announcement of student debt relief, were fraudulent. Apparently, even though Google was alerted to the high level of scam ads in July, some of the same scam ads popped up after Biden's announcement in August.

Student Loan Services Should be Simple
Another concern is when semi-legitimate companies try to convince borrowers to pay for student loan services they don't need. There are service companies that offer to help with the loan forgiveness process for fees ranging from $400 to $600 to fill out the application. These companies are legitimate because they do provide a service, but it's one that borrowers, in most cases, do not need.

The Department of Education is aware of potential student loan debt forgiveness scams. In a recent interview Education Secretary Miguel Cardona said he's aware that "there are bad actors out there” and provided this simple advice: "Go to our website studentaid.gov/debtrelief to get information and don't go anywhere else. Don't open those emails. Don't."

A Program Specifically for Student Loans in Default
In addition to the pause on federal student loan payments until December 31, 2022, and the Student Loan Forgiveness Plan, the US Department of Education is offering additional relief for the roughly 7.5 million borrowers with student loans in collections.

The Fresh Start program, which was announced in April 2022, is designed to help borrowers pull their federal student loans out of collections. For more information, here is the link to the announcement Fresh Start Program Announcement.

Conclusion
As expected, due to its unprecedented and controversial nature, the federal student debt relief program appears to be a work in progress with an uncertain future. We will continue to monitor the situation for important developments. In the meantime, for all those who may be eligible for the federal student debt relief program to sign up for alerts, proceed with the online application in October and avoid the scams regarding the program.

Please contact your Herbein tax advisor through the form below if you have questions.

Article contributed by Adam Dopkowski