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Millions of students are carrying a lot of student-loan debt. Photo: Deodato Pangandoyon, Flickr

Student loans are weighing down many young people, and understandably, they're eager to escape. Unfortunately, many are jumping at opportunities to get rid of their debt quickly and easily, only to find out too late that they are scams. Learn more about student loan scams and how to avoid them.

Setting the stage
First, it's helpful to understand the student loan landscape, as it explains why this kind of scam is appealing to scammers. Ready for a big number? You might want to sit down first. The total outstanding student loan debt is close to $1.3 trillion. That's more than the total revolving credit card debt in America, and the second-largest kind of consumer debt after home mortgages.

It gets worse. According to a recent report by the credit reporting agency Experian, some 40 million Americans now carry student loan debt (in 2012, it was 71% of all students graduating from four-year colleges), and the total owed soared 84% just between 2008 and 2014. Among active credit users aged 18 to 34 who have student loans, the average owed is about $27,000.

So what's wrong with all that? Well, while we've long been in an environment with ultra-low interest rates, student loans typically carry high interest rates, which make them hard to pay off. Millions of borrowers are defaulting, which can significantly damage their credit rating, making it harder to borrow for a mortgage later or conduct other financial transactions.

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Aim to graduate with as little debt as possible. Photo: Charline Tetiyevsky, Flickr

The scams
In such a setting, then, many stressed-out student loan holders are looking for a way out, and are being offered one by scammers. A scammer might, for example, email you or post in a public space about a service that can erase student loan debt. You might be told that this is a new government service, too.

In order for you to take advantage of this terrific opportunity, you're asked to pay a fee so that the company in question can start negotiating to reduce or eliminate your debt. Other scammers might offer to consolidate your loans for free -- sometimes transferring your debt to another lender, and one with even higher interest rates.

Here's what you need to know: Student loans can only be forgiven under very limited circumstances. For example, when it comes to federal loans, if your school goes out of business while you're enrolled, or if you die, your loan can be forgiven. (Many private lenders won't accept death as a way out, though, and have been pursuing parents of deceased borrowers for payments.) You may qualify for partial or full forgiveness if you become permanently disabled or file for bankruptcy. There are also programs that can lead to forgiveness, such as military service or teaching in a low-income region.

Meanwhile, know that the federal government has a loan consolidation service that's free. You should not be paying anyone for that service.

Heed these tips
The Better Business Bureau has warned consumers about these scams, and offers some tips:

  • Never pay upfront. Real lenders will take a percentage once their service is complete. You don't need to pay an upfront fee beforehand. 
  • Know your options. If you are having trouble paying your student loans, contact your lender directly. You should research programs offered by the federal governments of the U.S. and Canada. (Visit the Federal Student Aid Office of the U.S. Department of Education for many options regarding forgiveness or flexible repayment plans.)
  • Never give a third party power of attorney. Don't sign anything giving a company the power to negotiate on your behalf. A scam company can use this to take control of your loans. 
  • If it seems too good to be true... it probably is. Any company that claims it can erase your student loan debt in minutes is lying. Don't bother responding to the ad or email.
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Keep your wits about you, lest you fall for a scam. Photo: Bark, Flickr


Here are some more tips about student loans in general:

  • When borrowing, try for federal loans first. Some, such as unsubsidized Stafford loans and PLUS loans don't even require you to demonstrate financial need to qualify. Federal loans tend to offer better interest rates and repayment options.

  • Try to borrow as little as possible, and definitely aim to not end up owing more than you expect to make in your first year out of school. You might want to consider a less expensive school, such as a public one, to cut costs.

The folks at FinAid.org add this nugget: "Submit the Free Application for Federal Student Aid (FAFSA) at www.fafsa.ed.gov to apply for federal and state grants and search the Fastweb scholarships database to find scholarships for which you are eligible. Every dollar you get in grants and scholarships is a dollar less you will need to borrow."

It's reasonable to be stressed out if you owe a lot in student loans. But don't fall for scams in desperation. Instead, research your other options, because you do have some.

Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.