Suit: Companies Duped Victims Struggling With Student Loan Debt

— -- Two companies that promised to help Americans struggling with student loan debt instead allegedly pocketed their money and did little or nothing to help them, in a scheme that one state regulator warned is an emerging area of fraud nationwide.

Illinois Attorney General Lisa Madigan filed lawsuits Monday against the companies, First American Tax Defense LLC of Chicago and Broadsword Student Advantage LLC of Frisco, Texas, alleging they charged large upfront fees for bogus services or for government programs that consumers could have obtained for free. The suits are the first of their kind aimed at an industry that has drawn scrutiny from federal and state authorities.

The lawsuits contend that the companies preyed upon people who were desperate to lighten their student loan burdens. The companies allegedly charged consumers illegal upfront fees as high as $1,200 or tacked on monthly recurring fees, claiming they could reduce or eliminate their student loan debt or consolidate their loans. Representatives of the companies could not be reached for comment Monday.

First American touted its expertise in enrolling consumers in a so-called “Obama Forgiveness Program” and charged consumers for borrowers’ assistance applications that are free of charge through the U.S. Department of Education, the suit alleges. Some consumers said First American employees claimed to be affiliated with the federal education department and charged people $700 to $1,199 in illegal upfront fees, according to the suit.

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U.S. student loan debt has hit a whopping $1.2 trillion, making it an area ripe for fraud, consumer advocates say. Many of the 40 million Americans who have student loans have low-paying jobs and are having a tough time making their monthly loan payments.

In some cases, teachers, nurses, police officers, fire fighters or other public service workers were specifically targeted. Broadsword’s radio ads told public sector workers that “your entire student loan can be forgiven – you heard correctly.” Other consumers, the ads said, could “potentially cut their payments in half” or get other relief, the lawsuit alleges. Some consumers were steered into agreements requiring $499.99 upfront and a recurring monthly fee of $49.99 -- money that actually went to a related financial planning company, not a debt relief organization, the suit says.

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Alleged potential victims included Sharone Brown, a Chicago police officer who contacted Broadsword while struggling to pay her mortgage and student loan debts. Brown said a Broadsword rep told her he could reduce her payments to $49 a month, down from about $450 – but she’d have to pay about $600 in fees.

“He said, ‘We can definitely help you, Mrs. Brown – that’s what this program is all about,’” Brown told ABC News. “He was so excited … he said, ‘You do not know how happy I am that I’m going to be able to help you.’”

Brown, who has a master’s degree in professional counseling, thought it sounded too good to be true, however, so she called the U.S. Department of Education. That’s when she learned that the federal program the rep had pitched wasn’t going to be active until 2017, she said.

Brown said she has since negotiated her payments down to about $308 a month and has made them all on time.

As for the debt relief companies, the police officer who works with at-risk youths said, “I think it’s a shame. … Sometimes people tend to prey on those who are the most vulnerable.”

Both companies advertised heavily on the radio. Matthew, a New York consumer who did not want his last name used because he is concerned about his legal career, said he called First American after his dad heard their radio ad and thought the company could help with his $200,000 in law school debts.

He said the sales representative quickly charged his debit card for $987, against Matthew’s wishes. After talking to his accountant, Matthew chose not to proceed with the program, but it took weeks of complaining to get a refund.

“They’re preying on people who are scared,” he told ABC News. “People are just looking for any kind of help they can get.”

The companies have racked up scores of complaints at the Better Business Bureau; the consumer organization gives them each an “F” rating.

The lawsuits filed Monday in Illinois allege the companies are in violation of that state’s Consumer Fraud and Deceptive Business Practices Act, the Credit Services Organizations Act, and the Debt Settlement Consumer Protection Act.

Consumer advocates who’ve fought against fraudulent “mortgage rescue” operations in recent years – and losses to those are reported to be at least $83 million – are concerned that crushing student loan debt is the next area ripe for consumer fraud.

In a 2013 report, the National Consumer Law Center warned that debt settlement companies were making exaggerated promises about how much they could help borrowers and that “such practices severely compound the pain of vulnerable consumers seeking to find resolutions to difficult student debt problems.”

Consumers who are struggling with student loan debt should never pay upfront for help. For information on legitimate sources of free assistance, consumers can contact the Consumer Financial Protection Bureau or the National Consumer Law Center. For problems with a student loan servicer or a debt collector, consumers can also contact the U.S. Department of Education’s Student Loan Ombudsman at (877) 557-2575 or www.ombudsman.ed.gov, or the Consumer Financial Protection Bureau.

As for whether to consolidate loans, borrowers need to think carefully about whether that’s the best choice for them. Consolidation may lengthen the amount of time the loan runs and wipe out benefits associated with the original loans, causing the borrower to pay more in the long run.

If you do choose consolidation, you can apply for it at no charge through the U.S. Department of Education; for more info go to https://studentloans.gov.