Are Student Loans Predatory? Understanding the Risks and How to Protect Yourself

• Student loans aren’t inherently predatory, but certain practices by lenders and servicers can make them predatory in nature.

• Predatory student loans often feature double-digit interest rates, high origination fees, and terms that can turn modest balances into unmanageable debts.

• Predatory lending disproportionately affects women and people of color due to existing wealth gaps.

• Recent legal actions, like the $1.85 billion Navient settlement in 2022, highlight the prevalence of predatory practices in the student loan industry.

• Consumer protection laws like the Fair Credit Reporting Act and Truth in Lending Act provide tools for borrowers to fight against predatory practices.

If you’re one of the millions of Americans struggling with student loan debt, you might be wondering if your loans are predatory. The truth is, student loans aren’t inherently predatory, but certain practices – like excessive interest rates, hidden fees, or aggressive collection tactics – can trap borrowers in cycles of debt. Navigating these issues often requires a thorough understanding of student loan dispute rights and options, especially when dealing with potentially unfair or deceptive lending practices.

Bad policies that capitalize interest, poor management by loan servicers that add even more money to your balance, and failures to properly implement student loan forgiveness programs can all trap you in a cycle of debt. These issues can make your loans feel predatory, even if they didn’t start out that way.

What’s more concerning is that these predatory practices don’t affect all borrowers equally. Recent studies show that women and people of color are disproportionately impacted by predatory student lending. This disparity stems from existing gender and racial wealth gaps, which can make it more difficult for these groups to manage high-cost, high-risk loans.

For instance, a 2023 report from the California Department of Financial Protection and Innovation (DFPI) found that Black and Latino borrowers are hit especially hard by student loan debt, often facing higher debt loads and more repayment struggles due to systemic inequalities.

As a borrower, you’re dealing with federal student loans managed by the federal government or private student loans. While federal loans generally offer more protections, they can still become burdensome due to complex repayment plans and servicing issues. Private loans often carry higher risks, with some lenders using practices that can significantly increase your debt over time.

Congress has made noise about reforming the industry, and the Biden administration has tried to help by expanding existing student loan forgiveness programs. But there’s still a lack of targeted debt relief actions against predatory practices, especially by private lenders like Navient and Sallie Mae. These companies have faced legal scrutiny for unfair lending practices affecting borrowers of all backgrounds.

If you’re feeling overwhelmed by your student loan debt, it’s crucial to understand:

1. What makes your student loan terms potentially predatory

2. How to identify if you’ve been subjected to unfair practices

3. Steps to protect yourself from further financial harm

4. Your rights regarding loan repayment and student loan servicing

This guide will help you navigate these complex issues and take control of your student loan situation.

Predatory loans trap you in a cycle of debt through unfair, deceptive, or abusive practices. While there’s no single legal definition, your loan might be predatory if it has any of these features:

1. Excessive Interest Rates: If you’re offered loans with interest rates significantly higher than the market average, especially variable rates that can increase dramatically, be cautious.

2. Hidden or Misleading Fees: Be wary of loans that charge you unexpected fees for origination, early repayment, or other normal loan activities.

3. Aggressive Marketing Tactics: If you feel pressured by high-pressure sales techniques, especially if you’re a first-generation college student or from a low-income family, this could be a red flag.

4. Lack of Transparency: If you find the loan terms difficult to understand or not fully disclosed upfront, it’s a cause for concern.

5. Unnecessary Add-on Products: Be skeptical if lenders push additional products like credit insurance that may not benefit you.

6. Loan Steering: Watch out for lenders who guide you toward more expensive loans, even when you qualify for better terms.

7. Disregard for Ability to Repay: Be cautious of lenders who offer you loans without considering whether you can realistically afford to repay them.

8. Restrictive or Unfair Repayment Terms: If the loans make it difficult for you to repay or don’t offer flexibility in cases of financial hardship, they could be predatory.

9. Excessive Collection Practices: Be aware that lenders who use overly aggressive or harassing tactics to collect on delinquent loans may be engaging in predatory practices. If you’ve fallen behind on payments due to predatory lending, there are strategies for removing late payments from your credit report that you can explore.

10. Lack of Consumer Protections: Unlike other types of debt, student loans often come without standard consumer protections. They’re extremely difficult to discharge in bankruptcy, can’t be easily restructured, and often have no statute of limitations. This leaves you vulnerable to lifelong debt.

11. Conflicting Oversight Interests: The organizations meant to oversee student lenders (called “guarantors”) often profit from your struggles. They make a significant portion of their revenue from fees and penalties on defaulted loans, creating a perverse incentive system.

12. Broader Collection Rights: Student lenders typically have more extensive debt collection rights than other types of lenders, giving them a better chance of collecting money owed, even if it causes you significant financial hardship.

A loan doesn’t need to have all these features to be considered predatory. Even one or two of these characteristics can potentially harm you as a borrower. While the U.S. Department of Education and the Consumer Financial Protection Bureau (CFPB) work to protect you from such practices, predatory lending still occurs in the student loan industry.

These characteristics are strikingly similar to other forms of lending widely considered predatory, such as subprime mortgages and payday loans. In all these cases, lenders may profit more when borrowers struggle to repay as originally agreed.

To protect yourself from predatory student loans:

1. Prioritize Federal Loans: Exhaust your federal student aid options first. Fill out the FAFSA to check your eligibility for federal loans, which typically offer better terms and protections.

2. Research Lenders: For private loans, investigate the lender’s reputation. Check reviews, complaints, and legal actions against them on the CFPB’s consumer complaint database.

3. Compare Offers: Don’t settle for the first loan you see. Get quotes from several lenders and compare their terms side by side.

4. Scrutinize Loan Terms: Before signing, review the interest rates (fixed vs. variable), repayment terms, fees (like origination and prepayment penalties), and deferment or forbearance options.

5. Beware of Pressure: If a lender pushes you to decide quickly or uses aggressive marketing, walk away. Take your time.

6. Avoid Unnecessary Add-ons: Be cautious of lenders selling additional products like credit insurance. You probably don’t need them.

7. Look for Income-Driven Repayment: Choose loans with flexible repayment plans based on your income. They’ll help if you face financial difficulties after graduation.

8. Question “Too Good” Promises: Guaranteed approval, no credit checks, or instant loan forgiveness? Be skeptical. These often signal a scam.

9. Consider Your School: Attending a for-profit college? Be extra cautious. These schools have been linked to higher rates of predatory lending.

10. Seek Advice: Unsure about a loan offer? Talk to your school’s financial aid office or a financial advisor. They can help spot red flags.

While federal student loans can become burdensome, private student loans often carry even greater risks of predatory practices. Here’s what you need to watch out for:

1. Limited Consumer Protections: Unlike federal loans, private student loans lack many important borrower safeguards. They’re not eligible for income-driven repayment plans, and you can’t count on loan forgiveness programs. Perhaps most critically, private student loans are difficult to discharge in bankruptcy, leaving you with few escape routes if you struggle to repay.

2. Variable Interest Rates: Many private lenders offer loans with variable rates that can increase over time. While the initial rate might seem attractive, even small increases can dramatically impact your long-term costs. For example, a 1% rate hike on a $30,000 loan could cost you an extra $3,000 over a 10-year repayment period.

3. Fewer Repayment Options: Federal loans offer multiple repayment plans, including income-driven options that cap your payments based on your earnings. Private loans rarely offer this flexibility. If you lose your job or face financial hardship, you might find yourself without options to lower your payments, potentially leading to default.

4. Cosigner Risks: Many private student loans require a cosigner, often a parent or relative. What many borrowers (and cosigners) don’t realize is that the cosigner is equally responsible for the debt. If you can’t pay, your cosigner’s credit score can take a hit, and they might face aggressive collection tactics. While some lenders offer “cosigner release” after a period of on-time payments, the requirements are often difficult to meet.

5. Aggressive Collection Practices: Private lenders typically employ more aggressive collection tactics than federal loan servicers. This can include frequent calls, emails, and even legal action. These practices can damage your credit score and impact your future financial opportunities, making it harder to rent an apartment, buy a car, or secure a mortgage.

6. Limited Forgiveness Options: While the federal government offers several loan forgiveness programs, private lenders rarely do. Some private lenders may advertise “loan forgiveness,” but these programs are often just modified repayment plans that can end up costing you more in the long run.

7. Deceptive Marketing Tactics: Some private lenders use misleading marketing strategies to target vulnerable students. They might promise “guaranteed approval” or “instant forgiveness,” or use high-pressure sales tactics to push you into a decision. Always be wary of lenders who rush you or make promises that seem too good to be true.

Related:

If you suspect you’re trapped in a predatory student loan, it’s crucial to act quickly and decisively. Start by gathering all your loan documents, including the original agreement, payment history, and any correspondence with your lender or servicer. Review these carefully, noting any discrepancies between what you were promised and what’s in writing. If you find errors in how your loans are being reported, you may need to dispute your student loans on your credit report.

Your next step should be to file formal complaints. This creates an official record of your issue and can lead to intervention on your behalf. File complaints with:

• The Consumer Financial Protection Bureau (CFPB) at consumerfinance.gov or 855-411-2372

• The Federal Trade Commission (FTC) at ftc.gov or 877-382-4357

• Your state’s Attorney General’s office

After filing complaints, contact your loan servicer in writing. Express your concerns clearly and request a full explanation of your loan terms and any practices you believe are predatory.

To ensure your letter is effective, consider using our step-by-step guide and free template for writing a student loan dispute letter. Keep copies of all correspondence for your records.

Consider seeking legal advice from a student loan attorney or consumer protection lawyer. Many offer free initial consultations and can provide valuable insights into your options. They may also help you explore loan discharge options, especially if you attended a for-profit school that engaged in fraudulent practices.

While you’re addressing the predatory aspects of your loan, it’s important to protect your credit. If you’re struggling to make payments, communicate with your lender about hardship options before missing payments. This can help safeguard your credit score while you work to resolve the issues with your loan.

You might also want to investigate consolidation or refinancing options with a reputable lender. This could potentially secure better terms for you. However, be cautious about consolidating federal loans into private loans, as you may lose important borrower protections.

Throughout this process, stay informed about student loan policies and class-action lawsuits. Key resources include:

• The Department of Education’s Federal Student Aid website

• The Project on Predatory Student Lending

Even if you’re disputing your loan, continue making payments if possible to avoid default. If you’ve already missed payments due to predatory practices, you might consider writing a goodwill letter to request late student loan payment removal. If you can’t pay, discuss your options with your servicer or a financial advisor.

Consumer protection laws are your first line of defense against predatory student lending practices. Here’s how these laws have been used to combat unfair practices and how you can leverage them:

Fair Credit Reporting Act (FCRA)

The FCRA gives you the right to access your credit information and dispute inaccuracies. This is crucial given that over the last three years, the Consumer Financial Protection Bureau has received over 31,000 complaints about student loan servicing, with 25% relating to inaccurate loan information.

To use this law:

• Request your free annual credit report from each major bureau

• Review the student loan entries carefully

• Dispute any errors directly with the credit bureaus

Lenders must investigate and correct inaccurate information within 30 days.

Truth in Lending Act (TILA)

TILA ensures you receive clear disclosure of loan terms before signing. This act has been instrumental in cases like the 2022 Navient settlement, where the company was accused of steering borrowers into costly forbearance plans without fully explaining the consequences.

If your lender violated TILA by hiding or misrepresenting crucial information:

• You may have up to three years to rescind the loan

• You can file a complaint with the CFPB, which has the authority to enforce TILA

Equal Credit Opportunity Act (ECOA)

The ECOA protects you from discrimination in lending based on race, color, religion, national origin, sex, marital status, age, or receipt of public assistance. This is particularly important given the disproportionate impact of predatory lending on women and people of color, as highlighted in the 2023 California Department of Financial Protection and Innovation report.

If you suspect discrimination:

• File a complaint with the CFPB

• Consider seeking legal advice to explore your options

Federal Trade Commission Act

This act prohibits unfair and deceptive practices in lending. The FTC has used this law to combat student loan scams, most notably through “Operation Game of Loans” in 2017, which cracked down on fraudulent debt relief services that had collected over $95 million in illegal fees.

If you encounter unfair practices:

• Report them to the Federal Trade Commission

• Keep detailed records of all interactions with the lender

Higher Education Act

The HEA provides options for federal loan discharge in cases of school closure or false certification. This has been crucial in addressing the $5 billion in “shadow student debt” generated by now-defunct for-profit schools like ITT Technical Institute and Corinthian Colleges.

If you attended a school that closed or engaged in fraudulent practices:

• Check your eligibility for loan discharge on the Federal Student Aid website

• Submit a Borrower Defense to Repayment application if applicable

These laws are there to protect you.

In December 2022 alone, the CFPB announced that over 23,000 student loan borrowers would receive restitution checks as a result of a multi-million dollar lawsuit against predatory debt relief companies. By understanding and asserting your rights under these laws, you can protect yourself from predatory practices and potentially find relief if you’ve been a victim.

If you believe your rights have been violated, don’t hesitate to seek legal advice. Many consumer protection attorneys offer free initial consultations and can help you navigate the complex landscape of student loan law.

Predatory student loans trap borrowers through unfair practices like excessive interest rates, hidden fees, and aggressive marketing. Both federal and private loans can have predatory features, though private loans often carry higher risks. Borrowers facing predatory practices have options, including filing complaints and leveraging consumer protection laws.

Understanding these issues helps in making informed decisions about student loans and addressing problems that arise. Read our guide on How to Dispute Student Loans on Your Credit Report for more on managing your student loans effectively.