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WASHINGTON -- The U.S. Consumer Financial Protection Bureau announced Thursday that it was taking legal action against two companies offering to help students take advantage of federal loan benefits that officials said amounted to a “scam.”

The bureau said the companies engaged in predatory practices by overpromising the help they could provide borrowers and illegally charging borrowers upfront fees to help them apply for federal loan benefits that are free.

The bureau sought a court order to shut down College Education Services, which ran and Officials accused the company; its owner, Marcia Elena Vargas; and an adviser and employee, Frank Liz, of charging illegal advance fees, falsely promising lower payments, and falsely promising that it could quickly stop court-ordered wage garnishment.

In addition, the CFPB filed a lawsuit against Student Loan Processing.US, alleging that the company falsely represented its affiliation with the U.S. Department of Education, charged illegal advance fees, and deceived borrowers about the costs and terms of its services.

The company was accused of using a company logo that resembles a government seal, creating the impression that the marketing material is endorsed by the federal government. In some cases, the suit alleges, the company advised students who may have qualified for zero payments under federal loan benefits to pay $39 a month without explaining that the fee was going to the company rather than paying off their debt.

“Student loans are already a significant debt for many Americans. College Education Services and Student Loan Processing.US added to that hardship by taking advantage of troubled borrowers and failing to describe their services honestly,” CFPB Director Richard Cordray said in a statement. “When scam artists prey on student loan borrowers, we will take action to halt their illegal activity.”

Student Loan Processing said it disputed the allegations in the CFPB’s lawsuit.

Jim Krause, the company’s president, said in an email that he had cooperated with the bureau’s investigators for “more than a year” and that he was surprised the lawsuit was filed. He defended the company’s services as helpful to borrowers who might not otherwise know about their federal loan consolidation options or be able to “navigate the complex waters of [the Department of Education’s] student loan consolidation.”

“We stand by our services, and we look forward to our day in court,” Krause said.  

An attorney for College Education Services did not immediately return requests for comment on Thursday.

In announcing the actions against College Education Services and Student Loan Processing, the CFPB also issued an “alert” to consumers about companies offering student debt relief services. The companies “may cost you thousands of dollars and drive you further into debt,” wrote the bureau's student loan ombudsman, Rohit Chopra.

Consumer advocates praised the CFPB’s actions against the debt relief companies.

“We have unfortunately seen student loan debt relief business grow and engage in even more abusive practices,” said Deanne Loonin, the director of the Student Loan Borrower Assistance Project at the National Consumer Law Center, which represents low-income borrowers. “Too many of these companies charge even higher fees for services that borrowers can get for free.”

The CFPB’s actions against the student debt relief services come as the bureau’s portfolio of higher education-related work has expanded in recent years.

The bureau has two ongoing lawsuits against for-profit colleges, Corinthian Colleges and ITT Educational Services. CFPB regulators are now supervising the nation’s largest student loan servicers. And the bureau has been active in criticizing what it sees as practices that are harmful to consumers in the private student lending market. 

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