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Feature Articles: Loans


Avoiding deceptive student loans


A college or other post-secondary education can be expensive and usually requires you or your family to take out loans to pay the bill. Because there are so many options when it comes to student loans, it’s important to be educated about the different types of loans.


There are two types of student loans: federal loans and private loans, and three kinds of loans regulated by the federal government.


  1. Direct loans, U.S. Department of Education is the lender
  2. Federal Family Education Loans (FFEL), made by private lenders, backed by the federal government
  3. Federal Perkins loans


Private loans are sometimes called alternative loans. Loans from private lenders do not include the same benefits and protections as federal loans.


The Federal Trade Commission (FTC) and the U.S. Department of Education, which oversees federal student loans, provide information to help spot potentially deceptive claims or business practices some private companies may use. You may be targeted by deceptive practices whether you are taking out a new loan or consolidating existing loans.


Private loans


Private companies often use direct mail marketing, telemarketing, TV, radio and online advertising to promote their products.


Comparing the costs of your options for financing your education is important. Private loans tend to have higher fees and interest rates than federal government loans. Private loans do not offer opportunities for cancellation or loan forgiveness that many federal loan programs offer. For this reason, it makes good financial sense to take advantage of all your federal loan options (as well as grants and scholarships) before you consider loans from any private companies. To learn more about federal government loans, go online to


If you are considering a private student loan, make sure you know who you are doing business with. Take time to understand all the terms of the loan. These tips can help you recognize questionable claims and practices related to private student loans.


  • Some private lenders and their marketers use names, seals and logos that are similar to government agencies to give you the false impression that they are part of or affiliated with the federal government and its student loan programs.

  • The Department of Education does not send advertisements or mailers, or use other ways to persuade consumers to borrow money. If you get a student loan offer, it is not from the Department of Education.

  • Don’t let promotions or incentives like gift cards, credit cards and sweepstakes prizes trick you or distract you from looking at key terms of the loan to see if they are reasonable.

  • Don’t give out personal information on the phone, through the mail or over the Internet if you do not know who you are dealing with. Private student lenders typically ask for your student account number — often your Social Security number (SSN) or Personal Identification Number (PIN) — saying they need it to help determine your eligibility. Scam artists masquerading as private student lenders can misuse personal information, which is the reason it is so important to thoroughly check out a potential private lender.

  • Check out a particular private student lender with the Missouri Attorney General via e-mail at or by calling 800-392-8222, and the Better Business Bureau online at or 703-276-0100.


Things to consider before consolidating federal loans


Student loan consolidation is combining several loans into a single loan with a new repayment term and interest rate. Federal loans can usually be consolidated. There can be potential problems related to loan consolidation.


  • Avoid lenders and marketers who use high-pressure sales tactics. Some marketers pitch that “your interest rates may go up if you do not consolidate immediately!” The interest rate changes for consolidating your loans depends on what type of loans you have. Look at your loan documents to see whether the interest rates are fixed or variable:
    • If all of your education loans have fixed interest rates, there may be no deadline to consolidate.
    • If some or all of your loans have variable interest rates, when you consolidate into a fixed loan it may affect the interest rate of your loan. The Department of Education publishes new variable rates for some federal loans each July 1. The annual rate changes can raise or lower the interest rate offered on a consolidated loan because the consolidation interest rate will be the weighted average of all loans consolidated.

  • Take your time to decide whether consolidating is right for you.

  • Some lenders impose restrictions and other conditions on the discounts they promise. You may have to read the fine print in your loan documents to find them.
    • Some lenders lower the interest rate only if you opt for automated payments from your checking account.
    • Other lenders discount the interest rate only if your loan has more than a specific minimum balance.
    • Others agree to lower the interest rate only if you stay current on your payments during the life of the loan.
    • You may want to find loans with more immediate discounts, a shorter on-time payment period or an additional discount for signing up for automatic payments.

  • Some lenders sell consolidated loans to other companies. Ask the lender if the interest rate or other terms of your loan will change if it is sold.

  • Be careful about consolidating federal and private loans into one private loan because you lose all the benefits and protections that federal loan programs provide.

  • Consolidating a Perkins loan may not be in your best interest. You may lose unique deferment and cancellation rights available to Perkins loan borrowers. For more information about these rights, go online to


For more information or to file a complaint


To learn about federal student loans, contact the U.S. Department of Education at:
U.S. Department of Education, Federal Student Aid Information Center
P.O. Box 84
Washington, DC 20044-0084
800-4-FED-AID (TTY: 800-730-8913)


Notify the Federal Student Aid Ombudsman at 1-877-557-2575 or if you have a complaint that you cannot resolve with your lender.


For questions about a particular private lender, contact the federal agency with jurisdiction over that lender. Office of the Comptroller of the Currency regulates banks with “national” in the name or “N.A.” after the name:
Office of the Ombudsman, Customer Assistance Group
1301 McKinney Street, Suite 3450
Houston, TX 77010
800-613-6743 toll-free


The Board of Governors of the Federal Reserve System regulates state-chartered banks that belong to the Federal Reserve System, bank holding companies and branches of foreign banks:
Federal Reserve Consumer Help
P.O. Box 1200
Minneapolis, MN 55480
888-851-1920 toll-free (TTY: 877-766-8533)


The Federal Deposit Insurance Corporation regulates state-chartered banks that are not members of the Federal Reserve System:
Division of Supervision & Consumer Protection
550 17th Street, NW
Washington, DC 20429
877-ASK-FDIC (877-275-3342) toll-free


The National Credit Union Administration regulates federally chartered credit unions:
Office of Public and Congressional Affairs
1775 Duke Street
Alexandria, VA 22314-3428


The Office of Thrift Supervision regulates federal savings and loan associations, and federal savings banks:
Consumer Programs
1700 G Street, NW
Washington, DC 20552
800-842-6929 toll-free


The Federal Trade Commission regulates non-bank lenders:
Consumer Response Center
600 Pennsylvania Avenue, NW
Washington, DC 20580
877-FTC-HELP (877-382-4357) toll-free


Federal Student Aid, an office of the U.S. Department of Education, administers federal student financial aid — grants, loans, and work-study programs — available for education beyond high school. Federal Student Aid interacts with postsecondary schools, financial institutions and other participants in the student aid programs to help students and families plan and pay for college. For more information about Federal Student Aid and how to pay for college, go online to or call 800-4-FED-AID.


Adapted from FTC Facts for Consumers, Student Loans: Avoiding Deceptive Offers, A joint publication of the Federal Trade Commission and the U.S. Department of Education, June 2008, at


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Last update: Tuesday, October 18, 2011