Beware of student loan consultants offering “forbearances,” a fancy word for an option that allows borrowers to temporarily postpone payments.

That’s the finding from a new report by the Government Accountability Office, which details how some colleges hired “default prevention” consultants to contact former students who were falling behind on federal student loan payments. Some consultants may promote short-term fixes that can mire students in more debt down the road, the report said.

The GAO found that some consultants were steering borrowers into potentially costly “forbearances,” rather than more helpful options like flexible repayment plans.

Students in forbearance can temporarily stop making loan payments, yet be considered current on their loans. But interest still piles up, so students can end up owing much more than they did in the first place.

Colleges have an incentive to keep borrowers up to date on their loans, the report said, because if too many borrowers default within three years of starting repayment, the college may lose its eligibility to offer federal financial aid to current students.

Once borrowers pass the three-year mark, a default no longer counts as a blemish on the college’s record.

Borrowers in long-term forbearance defaulted more often in what would be their fourth year of repayment, when colleges are no longer penalized for defaults, the report found, suggesting that forbearance had merely delayed default, rather than preventing it.

Consultants have an incentive to promote forbearances, the GAO found, because they usually can be approved quickly over the phone.

In contrast, borrowers must fill out an application and submit documentation of their income to switch to a special payment plan.

Approval can take two weeks or more.

“This structure can result in borrowers being pushed into forbearance despite better options,” said Melissa Emrey-Arras, an education director at the GAO and a contributor to the report.

The report analyzed data on federal loans that entered repayment from fiscal years 2009 through 2013, and focused on nine companies that offer default prevention services, out of about four dozen such companies. (The nine served about 1,300 colleges, and accounted for about 1.5 million borrowers who entered repayment in 2013.)

Of the nine, five encouraged forbearance over other options, and four sometimes provided “inaccurate or incomplete” information to borrowers, the GAO found. In one case, a consultant mailed forbearance applications to past-due borrowers, along with a letter incorrectly stating that they could lose federal benefits like food assistance, if they defaulted on their student loans.

The report did not identify the consultants or the colleges that had hired them. Abby Shafroth, a lawyer with the National Consumer Law Center, said such consultants may often be retained by for-profit colleges, which tend to rely heavily on federal student aid programs for revenue.

Some companies that promote default prevention services on their websites focus on two-year community colleges, although some include testimonials from traditional, four-year colleges.


Ann Carrns writes for the New York Times.